More on the Flowers Foods Spin-Off
I recently wrote an article on the tax ramifications of the spin-off of Flowers Foods.
The advice in that article has been publicly challenged by Adrienne Gormley of Easyware. It is unfortunate when advisors on these matters give conflicting tax advice. Therefore, I am writing this second article to show the documentation for my position and, I hope, to show Adrienne and Easyware the error of their ways.
To refresh your memory, the transaction consisted of redeeming shares of Flowers Industries with cash and shares of a new company, Flowers Foods. I had said that you account for the transaction by recognizing a sale of the Flowers Foods stock in the amount of the cash received plus the fair market value of the new stock received.
Easyware took a different approach, saying that the shares of the new company represent ordinary income as a dividend, and the cash received represents a sale of the old stock. In effect, they are saying that this is two separate transactions, and should be recognized as such.
This treatment flies in the face of the way that the companies structured the transaction. As will be documented later, they took great pains to say that it was a single transaction of redeeming the old shares of Flowers Industries for cash plus shares of Flowers Foods. Here is an excerpt from the website of Flowers Industries at
Will Flowers Industries' shareholders be taxed on the distribution of
Flowers Foods common stock? On the cash payment from the Kellogg merger?
The receipt by Flowers shareholders of cash and shares of Flowers Foods
common stock will be a taxable transaction for U.S. federal income tax
purposes and should be taxed as a capital gain. The tax consequences for
each shareholder will vary depending on each shareholder's
circumstances. Shareholders are urged to consult with their tax
Note that they say the receipt of both the cash and shares will be treated as capital gain, not as dividend income and capital gains, as Easyware proposes. Incidentally, the Easyware approach results in higher taxes, since a part of the proceeds will be taxed as ordinary income.
I would hope that Adrienne and Easyware will rethink their position on this, and, in the interests of their users, retract their advice. Club treasurers don't need conflicting advice on taxes.
Now before I close, I have to say that nothing is certain with the IRS. The professionals who put this deal together did everything that they could to structure along the lines that I have indicated. As is customary in proxy statements, they did try to cover themselves by saying that the IRS could view this as two separate transactions, and thus recognize ordinary income and capital gains. They don't believe that will happen, and neither do I.
Here is the excerpt from the SEC filing.......

For United States federal income tax purposes, the transaction is intended to constitute a single integrated transaction with respect to Flowers Industries and its shareholders in which the spin-off will be treated as a distribution in redemption of outstanding common stock of Flowers Industries in connection with the complete termination of the Flowers Industries shareholders' interest in Flowers Industries. Although Flowers Industries believes that the foregoing description correctly characterizes the transaction for United States federal income tax purposes and, therefore, that the spin-off should qualify under Section 302(b) of the Code, either because the integrated combination of the spin-off and the merger results in a complete termination of the Flowers Industries shareholders' interests in Flowers Industries or because the spin-off, in conjunction with the merger, is not essentially equivalent to a dividend, there is no specific authority on this point and the issue is not free from doubt.
I have never seen any tax advisor recommend a course different from the way the it was structured by the company, especially when to do so results in a detriment to the taxpayer.
Rip West
Saint Paul, MN