Tax Considerations of Berkshire Hathaway’s Exchange of SiriusXM Stock for Liberty SiriusXM Tracking Stock

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

According to securities filings¹by Berkshire Hathaway Inc.  (NYSE: BRK.A) (Berkshire Hathaway) and Liberty Media Corporation²(Liberty Media) (among others), on November 3, Liberty Media acquired 43.7 million³shares of Sirius XM Holdings Inc.  (NASDAQ: SIRI) (SiriusXM) from Berkshire Hathaway⁴in exchange for 5.3 million⁵Series A (low-vote) shares of Liberty Media’s SiriusXM tracking stock (NASDAQ: LSXMA).

The result:  Liberty Media now owns about 80.2 percent⁶ (as opposed to only about 79 percent⁷ as of September 30, 2021 and only about 74 percent⁸ as of September 30, 2020) of the outstanding equity of SiriusXM (so that SiriusXM and Liberty Media are now members of the same consolidated tax group⁹ ) while Berkshire Hathaway now owns about 19.7 percent¹⁰ of the low-vote Liberty SiriusXM tracking stock.

In connection with the transaction, Liberty Media and SiriusXM entered into an agreement (the Section 253 Agreement^[11]) in which Liberty Media agreed not to bring about a short-form merger between the two companies under Delaware law without first obtaining approval from a Special Committee of SiriusXM independent directors.¹²While the exchange was intended to be tax-free to Berkshire Hathaway,¹³ it seems the tax-free nature of the transaction is expected to be even more advantageous to Liberty Media.

We have previously written about prospects and techniques for Liberty Media to engage in a tax-free separation of its principal holdings, each associated with a Liberty Media tracking stock.¹⁴ Copies of those reports are attached.  While the Atlanta Braves and Formula One businesses are wholly owned,¹⁵ prior to this recent transaction, Liberty Media owned an increasing percentage of SiriusXM’s outstanding stock, but not yet reaching 80 percent.  The central focus of attention with respect to eligibility for a tax-free spin-off has been when Liberty Media would reach five-year active trade or business (ATB) status with respect to either Formula One, SiriusXM or both.  January 2022 will be the five-year anniversary for Formula One, but what about SiriusXM?

As we discussed in our December 28, 2020 report, Liberty Media CEO Greg Maffei confirmed a year ago that the company was interested in increasing its ownership in SiriusXM to at least 80 percent, which was likely to occur in the relatively near future as a result of a program of stock buybacks by SiriusXM.  In that call, however, Maffei suggested that achieving 80 percent ownership of SiriusXM was not related to meeting the ATB requirements under Section 355 of the Internal Revenue Code (IRC) but rather to achieving certain tax benefits from filing a consolidated tax return with SiriusXM.

We pointed out in that report that obtaining an 80-percent ownership interest in SiriusXM as a result of taxable cash buybacks by the company would not be helpful in accelerating eligibility to spin off Liberty Media’s interest in SiriusXM.  Reaching 80-percent ownership in this way would likely commence a five-year waiting period in order to separate its SiriusXM interest on a tax-free basis.

Under IRC Section 355(b), the ATB test requires that a corporation have actively carried on the ATB for at least five years or have acquired an ATB with a five-year history in a nontaxable transaction within the previous five years.  This includes the acquisition of “control” of a corporation carrying on the ATB.  Control for this purpose is defined as 80 percent of the voting power and 80 percent of each class of nonvoting stock.¹⁶   Thus, in order to rely on the SiriusXM business to meet the ATB test (including doing a spin-off of SiriusXM itself), Liberty Media would have to have held 80 percent control for five years or have acquired control more recently in a tax-free transaction.

We indicated in our December 28 report that, although much of Liberty Media’s stock ownership in SiriusXM was acquired through taxable transactions, it is possible that it could satisfy the requirements of the tax law to acquire control in a tax-free transaction if it acquired enough shares from one or more SiriusXM shareholders to raise its level above 80 percent, solely in exchange for Liberty Media voting stock (presumably Liberty SiriusXM tracking stock), qualifying as a tax-free reorganization.¹⁷  This is apparently exactly what they have done in the transaction with Berkshire Hathaway.

Liberty Media and Berkshire Hathaway executed what was intended to qualify as a so-called B reorganization under IRC Section 368(a)(1)(B).  Though generally avoided because of its strict “solely for voting stock” requirement, a reorganization under Section 368(a)(1)(B) can be just the right fit for a transaction such as this.

Specifically, a stock exchange meets the statutory requirements for a B reorganization when an acquiring corporation (here, Liberty Media) acquires stock in a target corporation (here, SiriusXM) from a target shareholder solely in exchange for voting stock in the acquiring corporation, and the acquiring corporation controls the target (applying the 80-percent test referred to above) immediately after the transaction.  Although achieving tax-free treatment under the B reorganization provision does not require that the acquiring corporation not have controlled the target before the transaction, moving from below 80 percent to greater than 80 percent turns out to have been important for Liberty Media’s objectives.

In a November 4 call¹⁸ with analysts, Liberty Media CEO Greg Maffei was asked about the stock exchange transaction.  The questioner wanted to know whether it qualifies Liberty Media’s SiriusXM holding as an ATB and, with the company seemingly holding three ATBs as of the January 2022 Formula One anniversary, whether that suggests a planned “undoing [of] the whole tracking stock structure.”¹⁹ Maffei responded:

“We undertook a transaction where we did a tax-free exchange to make an ATB out of this.  Our famous line around here is no [plan or] intent and that’s one we—if you ever visit my office, you’ll see I have some pillows which say that . . .  But look, our whole idea is to create optionality.  We have nothing to announce today about that.  We would have gone over 80 [percent] probably with Sirius’[s] continued buyback. But the way we transacted with the tax-free exchange allowed [it] to become an ATB or something we expect will be an ATB and great optionality and flexibility. So no plans, but we always like having ATBs.  You can’t have enough of them.”²⁰ 

Another Q&A in the same call is worth noting.  The question was, “Is it more appealing to create long-term value by taking advantage of a persistent discount over a long period as capital becomes available to do so, say, using SIRI dividends to buy back Liberty SIRI shares?  Or would you rather close the discount as rapidly as possible?”  Though not fully committing to one or the other approach, Maffei responded, “This is a debate since the beginning of time.  And you could think about buybacks.  Are buybacks to be done to buy your own stock at a discount or to try and get your stock up?  We generally favor the long-term path . . .  But clearly, there is an advantage here to seeing the discount close as well.”²¹ 

Bringing this together, it seems clear that Liberty Media is not indifferent to the possibility of splitting the company into three without having to wait five years.  At a minimum, management does seem to want to make clear that spinning off its interest in SiriusXM to shareholders in the nearer term remains a possibility.

On the merits of the tax issue as to whether this tax-free acquisition of stock from Berkshire Hathaway enables Liberty Media to satisfy the ATB requirement immediately (as Maffei seemed to suggest), we think there is some uncertainty.  The relevant statute requires that control of a corporation that was conducting the trade or business was either not acquired during the previous five years, or control was acquired “by reason of transactions in which gain or loss was not recognized in whole or in part, or only by reason of such transactions combined with acquisitions before the beginning of [the five-year] period.”²² 

We think it is unclear whether there is an acquisition of control “by reason of transactions in which gain or loss was not recognized” where ownership increases up to a point below 80 percent (specifically, 79 percent) by way of taxable transactions, but the 80-percent threshold is passed in a tax-free transaction.²³  There are reasonable arguments for and against, and we would expect that before attempting to proceed with a tax-free spin-off depending on ownership of SiriusXM qualifying as an ATB following the Berkshire Hathaway transaction, Liberty Media will seek a private letter ruling from the IRS on this point.

^{[1] Amended statement of acquisition of beneficial ownership (Schedule 13G/A) dated Nov. 1 but filed Nov. 3, 2021 (https://www.sec.gov/Archives/edgar/data/0001067983/000119312521318411/d209839dsc13ga.htm); Statement of changes in beneficial ownership (Form 4) dated Nov. 1 but filed Nov. 3, 2021 (https://www.sec.gov/Archives/edgar/data/315090/000089924321042914/xslF345X03/doc4.xml)}

^{[2] Liberty Media’s shares are divided among three tracking stocks—Liberty SiriusXM (including NASDAQ: LSXMA), Liberty Braves (including NASDAQ: BATRA) and Liberty Formula One (including NASDAQ: FWONA)—each corresponding to the principal underlying holdings associated with the stock (although attributed to the Formula One tracking stock is Liberty Media’s approximate 32 percent interest in Live Nation Entertainment, Inc. (NYSE: LYV)). Liberty Media disclosed the exchange agreement in its quarterly report (Form 10-Q) filed Nov. 4, 2021 (https://www.sec.gov/ix?doc=/Archives/edgar/data/1560385/000155837021014622/lmca-20210930x10q.htm).}

^{[3] 43,658,800 shares of Sirius XM Holdings common stock}

^{[4] And certain of its subsidiaries (including GEICO Corporation) and its subsidiaries’ pension plans, all of which are deemed beneficially owned by the controlling stockholder of Berkshire Hathaway Warren E. Buffet.}

^{[5] 5,347,320 shares of Series A Liberty SiriusXM common stock, so that following the exchange, Berkshire owns a total of 20,207,680 shares.}

^{[6] https://www.sec.gov/Archives/edgar/data/908937/000110465921133910/tm2131725d1_sc13da.htm}

^{[7] https://www.sec.gov/ix?doc=/Archives/edgar/data/908937/000090893721000035/siri-20210930.htm}

^{[8] https://www.sec.gov/ix?doc=/Archives/edgar/data/908937/000090893720000043/siri-20200930.htm}

^{[9] https://www.sec.gov/ix?doc=/Archives/edgar/data/908937/000093041321001837/c102501_8kixbrl.htm}

^{[10] https://www.sec.gov/Archives/edgar/data/869614/000119312521318411/d209839dsc13ga.htm}

^{[11] Section 253 of the General Corporation Law of the State of Delaware}

^{[12] SiriusXM, Form 8-K and Section 253 Agreement made as of Nov. 1, 2021 between SiriusXM and Liberty Media (https://d18rn0p25nwr6d.cloudfront.net/CIK-0000908937/2ef5af91-1bf5-4f6a-97c8-b36b08dccf64.pdf).}

^{[13] The exchange was intended to qualify as a reorganization within the meaning of IRC §368(a)(1)(B) (https://www.sec.gov/Archives/edgar/data/908937/000110465921133910/tm2131725d1_sc13da.htm).}

^{[14] See “What Are Liberty Media’s Plans for Braves and SiriusXM” (Dec. 28, 2020); “Will Atlanta Braves Be Sold Before Teach Changes Its Name?” (Aug. 9, 2021).}

^{[15] http://www.libertymedia.com/companies/braves-group.html, http://www.libertymedia.com/companies/formula-one- group.html}

^{[16] IRC §368(c).}

^{[17] We also listed several alternative transactions with SiriusXM that could help finesse the acquisition of control issue.  Our prior report is attached.}

^{[18] Transcript from Motley Fool: https://www.fool.com/earnings/call-transcripts/2021/11/04/liberty-formula-one-group-fwona- q3-2021-earnings-c/}

^{[19] Id.}

^{[20] Id. Maffei subsequently stated: “We constructed a transaction where we had a tax-free exchange of our stock, which—that is what was required until we believe to make this an ATB rather than the alternative, which looked like it would might naturally occur, which was to have SIRI buy us over—excuse me, buy back their own stock and push us over 80%.  So the actions we took the positive action of doing a tax-free exchange, we believe, allows us to be an ATB.”}

^{[21] Id.}

^{[22] IRC §355(b)(2)(D)(ii).}

^{[23] There may be a stronger argument in the company’s favor where the taxable transactions involved buybacks by SiriusXM rather than taxable purchases by Liberty Media.}