The Substance Over Form Doctrine and the Up-C

Abstract

The Up-C is an increasingly popular form of IPO that generates significant tax benefits as compared to a traditional IPO. These tax benefits, which are the driving force behind the Up-C, have generally gone uncontested and are achieved by taking a form over substance approach to the Up-C for tax purposes. Governmental officials had never directly addressed the Up-C until recently when the SEC issued an interpretive letter (the Up-C Letter) condoning a substance over form approach to the Up-C for purposes of SEC Rule 144. As a result of the Up-C Letter, owners in an Up-C get the best of both worlds by inconsistently taking a form over substance approach for tax purposes and a substance over form approach for securities law purposes.

This Article analyzes whether this disparate treatment of the Up-C is justified from either a technical or policy perspective. It argues that the Up-C Letter supports using a substance over form approach to the Up-C for both securities and tax law purposes because the technical arguments for using a substance over form approach to the Up-C are essentially identical in both the tax and securities law contexts. This matters because if the IRS were to follow the SEC’s substance over form approach to the Up-C, the pre-IPO owners’ tax benefits would be all but eliminated. This Article also explores the possibility that the disparate treatment of the Up-C could be defended because the policy objectives of the applicable securities and tax law doctrines are different.

Keywords: Up-C, Tax Receivable Agreement, TRA, Rule 144, IPO, Initial Public Offering