JetBlue-Spirit Proxy Reduces but Retains Tax Uncertainty Associated with Pre-Closing Cash Payments

By Stuart E. Leblang, Michael J. Kliegman and Amy S. Elliott

On October 19, Spirit Airlines, Inc. (NYSE:  SAVE) (Spirit) stockholders approved ¹ the agreement for the airline to be acquired by JetBlue Airways Corporation (NASDAQ:  JBLU) (JetBlue).  Although the deal is still subject to other closing conditions—including regulatory approvals— the transaction is expected to close no later than the first half of 2024.

As we wrote about in our prior report, ² which is appended, the deal calls for JetBlue to pay Spirit shareholders $2.50 in cash per share payable immediately upon shareholder approval of the deal (the Approval Prepayment) and an additional $0.10 in cash per month per share between January 2023 and closing or termination of the deal (Additional Prepayment).  Most of these advance payments would reduce the $33.50 per share merger consideration and all of them would be paid out whether or not the merger is consummated.  The $2.50 Approval Prepayment was paid out on October 26 to Spirit stockholders of record as of September 12 (for a total payment of $272 million). ³ 

The tax treatment of these advance payments was briefly addressed in the September 12 definitive proxy statement issued by Spirit.^[4]Specifically, the proxy states that the “tax treatment of the approval prepayment and the additional prepayments to the Spirit stockholders is not clear.”  Despite leaving very open how the prepayments, including the Approval Prepayment that has now been “earned,” should be treated, the proxy statement significantly reduces one avenue of concern that we noted in our prior report.

We discussed the possibility that the prepayments might be treated as if paid by JetBlue to Spirit and then distributed as a dividend to the Spirit shareholders.  In this regard, the proxy states:  “The parties have agreed to report the [prepayments] as amounts paid by JetBlue to, and for the benefit of, the Spirit stockholders . . . .” ⁵ We think this indicates that the two companies have agreed not to “route” the payments for tax purposes through Spirit and to treat them as made directly from JetBlue to the Spirit shareholders.

That still leaves a lot of uncertainty (apart from the fact that the Internal Revenue Service could disagree and view the prepayments as property routed through Spirit).  The proxy states that the prepayments “could be treated as merger consideration paid before the closing of the merger . . . ; as gain realized by a U.S. holder in respect of a separate right or obligation with respect to its shares of Spirit common stock (e.g., if the merger is not consummated or if a U.S. holder disposes of its shares before the closing of the merger);^[[6]]or potentially as ordinary income to the U.S. holder.”  That’s a lot of uncertainty, but for U.S. investors, it will largely be up to them as to how they report the prepayments.

That being said, JetBlue plans to report the Approval Prepayment to the IRS on Forms 1099-MISC—at least for each U.S. investor that directly held his shares of Spirit common stock.  Because most investors hold their securities in street name (meaning the individual investor is not technically the record holder of the stock but simply the beneficial owner), JetBlue further advised that—in those cases—”[e]ach broker or other intermediary will be responsible for determining how to report the Approval Prepayment and the Form 1099 it will use for such purpose; JetBlue does not control the information reporting decisions of your broker and is not responsible for the form, content or timing of such reporting.”^[7]

With respect to non-U.S. investors, there is a chance that the advance payments could be treated as advance merger consideration giving rise to capital gain treatment not subject to withholding tax.  However, consistent with the alternative possibilities for domestic investors, the proxy notes the possibility that the advance payments could be treated as fixed or determinable annual or periodical (FDAP) income.  Such FDAP income might be U.S. sourced or non-U.S. sourced.  If the payments are treated as U.S.-sourced FDAP, they would presumably be subject to 30-percent withholding tax.

As a result, the proxy states overall that “[i]n light of the uncertainty as to the tax treatment of the [prepayments], there is a meaningful possibility that a broker, dealer, bank or other custodian that holds shares of Spirit common stock beneficially owned by a non-U.S. holder may withhold at a rate of 30% (or a lower rate under an applicable income tax treaty) on the entire amount of the [prepayments].” ⁸ 

Note, however, that because all non-U.S. Spirit investors receiving an Approval Prepayment did not hold their stock directly but through an intermediary, JetBlue did not withhold U.S. tax from any portion of the Approval Prepayment ultimately payable to non-U.S. investors (although the company warned that intermediaries might withhold and issue a Form 1042-S). ⁹ 

^{[1] Press Release, Spirit, Spirit Announces Stockholder Approval of Merger Agreement with JetBlue (Oct. 19, 2022) (https://www.sec.gov/Archives/edgar/data/1498710/000149871022000336/a221019stockholderapprov.htm).}

^{[2] “JetBlue-Spirit Deal Includes Pre-Closing Cash” (Aug. 12, 2022).}

^{[3] JetBlue, Approval Prepayment Tax Information for Brokers and Spirit Stockholders:  Investor FAQs (https://blueir.investproductions.com/~/media/Files/J/Jetblue-IR-V2/documents/approval-prepayment-tax-information-investor-faqs.pdf).}

^{[4] Definitive Proxy Statement, Spirit, filed Sept. 12, 2022 (https://www.sec.gov/Archives/edgar/data/1498710/000119312522242974/d378607ddefm14a.htm).}

^{[5] Id.}

^{[6] This may be based on the application of IRC §1234A discussed in our prior report.}

^{[7] Supra, note 3.}

^{[8] Supra, note 4.}

^{[9] Supra, note 3.}