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February 17, 2020 The Tax Lawyer

Whose Earnings and Profits? What Dividend? A Discussion Based on the Dr Pepper-Keurig Transaction

Vol. 73, No. 2 - Winter 2020

Jeffrey T. Sheffield


In July 2018, Dr Pepper Snapple Group, Inc. (“DPSG”) acquired all the stock of the Maple Parent Holdings Corp. (better known as “Keurig”) in exchange for DPSG common stock. The acquisition was unusual in two respects: DPSG paid its shareholders a pre-merger “special dividend” equal to approximately 87% of the stock’s value; DPSG then issued to Keurig’s shareholders DPSG stock equal to approximately 87% of the combined companies’ stock. This combination of events led to the issues discussed in this Article.

The Article first discusses the interplay of the Subchapter C rules regarding earnings and profits (“E&P”), and the timing of dividend payments, with the consolidated return regulations’ rules governing tax year ends, reverse acquisitions, and the replication of E&P mandated by the regulations’ group structure change rules. From there, the Article argues that the payment date for measuring the E&P of the special dividend should be the date of the merger (rather than the actual date of payment) and, contrary to the existing group structure change rules, the relevant E&P should not include any of Keurig’s E&P.

Second, the Article asks whether the special dividend should have been characterized as a dividend in the first place. Because Keurig was the source of the funds for the special dividend, the Article argues that the reasoning in Waterman Steamship and its progeny could be applied to recharacterize purported dividends as sales proceeds when the funds for the dividends are contributed by outsiders. It goes on to argue that a better approach would be to subject dividends, when coupled with a dilutive stock issuance, to the same type of dividend-equivalence tests developed for determining whether a redemption, or more specifically boot in a reorganization, should be treated as a dividend or sales proceeds for tax purposes. This latter approach would avoid many of the factual issues surrounding application of Waterman Steamship’s source-of-funds approach under current law.

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