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Q&A With Kirkland & Ellis' Sara Zablotney

Sara Zablotney is a tax partner in the New York office of Kirkland & Ellis LLP. Zablotney focuses her practice on the tax aspects of complex mergers and acquisitions, both domestic and international. She also advises clients on the tax aspects of securities issuances, bankruptcy and restructuring, and investment fund formation.

Zablotney has advised clients including Golden Gate Capital, Blum Capital Partners, Clearwire Corporation, Accenture, Sunoco, Epicor Software Corporation, Wyndham Worldwide Corporation, New Mountain Capital and Greenbriar Equity Group.

Zablotney and the Kirkland team were recently recognized at the International Tax Review’s Americas Tax Awards for their work on the “Americas Private Equity Tax Deal of the Year” and the “Americas Technology & Communications Tax Deal of the Year.” The private equity award reflects work on the acquisition of Collective Brands by Blum Capital Partners, Golden Gate Capital and Wolverine World Wide, while the technology and communications award involves the representation of Clearwire Corporation in its sale to Sprint.

Q: What is the most interesting or challenging tax problem you've worked on to date?

A: In my experience, the most complicated problems often arise from multiparty situations involving several tax jurisdictions and regulatory regimes. As one recent example, we represented a client in a complex series of out-of-court restructuring transactions. The client was subject to a restrictive regulatory regime and was negotiating with several different groups of creditors with competing interests.

We had to develop a solution that was palatable from a tax perspective, achieved as many commercial goals as possible for as many parties as possible and satisfied relevant regulatory requirements. The securities that were ultimately issued in the transaction had several novel features and satisfied the commercial, tax and regulatory objectives. To get to a solution, we had to work through several tricky issues related to the debt/equity analysis of the securities, the “contingent payment debt obligation” regulations, the cancellation of indebtedness rules and the rules that restrict a corporation’s ability to use its net operating losses after a change in ownership.

Another example is our representation of Blum Capital Partners and Golden Gate Capital in their joint acquisition with Wolverine World Wide — a public company — of Collective Brands Inc. — also a public company — followed by the taxable carve out of the Performance + Lifestyle group of Collective Brands to Wolverine World Wide. Not only did we have multiple parties and two nearly simultaneous transactions, but we also had to find a way to tease apart the Collective Brands group’s global operations in the most tax-efficient way possible within our commercial constraints.

Q: Currently, what is a pressing tax concern for your clients, and how are you addressing it?

A: My clients are very focused on the tax consequences associated with the movement of cash, people, goods and services across the globe. Though my practice principally focuses on acquisition and restructuring transactions, in formulating any acquisition structure, I work closely with my clients and their other advisors to make sure that we have put in place something that will work for them in the future.

They are also all extremely worried about complying with the Foreign Account Tax Compliance Act. In my practice, that usually means making sure that my client has the ability to obtain relevant FATCA documentation from counterparties and withhold where necessary as well as being aware of the compliance burden on it both when making and receiving payments.

Q: What do you anticipate being the biggest regulatory challenge in your practice in the coming year and why?

A: The reaction to the Internal Revenue Services' new ruling policy regarding nonrecognition transactions (Rev. Proc. 2013-32, 2013-28 I.R.B. 55) is still evolving, particularly in the spin-off area. Historically, taxpayers often sought IRS letter rulings in connection with spin-off transactions intended to qualify for tax-free treatment, particularly if there were any features to the transaction that were not squarely covered by the existing regulatory authority. Under the new ruling policy, the IRS will only rule on one or more issues in connection with a tax-free spin-off to the extent that the issue or issues are “significant,” rather than a whole transaction. However, the IRS reserves the right to rule on any other issues associated with the transaction if it so chooses — including adversely.

Anecdotally, it appears that clients are wondering whether obtaining such a limited ruling is worth the time and trouble. Given the high stakes usually associated with the ability to claim tax-free status on a spin-off transaction, and the existence of uncertainty in the existing regulatory authority, taxpayers may be more hesitant to engage in such transactions where the existing law and guidance is not clear. The IRS has announced that it is considering several guidance projects in the area, which hopefully will reduce the uncertainty in this area.

Q: Outside of your own firm, who is an attorney in your practice area whom you admire, and what is the story of how s/he impressed you?

A: I have had the pleasure of working with Jim Wreggelsworth at Davis Wright Tremaine LLP over several years in the course of our representation of Clearwire. Jim is an excellent technical tax lawyer, extremely creative and collaborative. Clearwire operated out of an “Up-C” structure, meaning that the public corporation owned an interest in a lower-tier partnership entity, with the remaining interests in the partnership owned by various strategic investors.

The formation of that structure raised several tricky and contentious partnership tax issues. Jim kept his sense of humor throughout round after round of negotiations with the strategic investors’ counsel and then repeated the process with the partnership experts in the national offices of the relevant accounting firms. If Jim ever got frustrated, I never saw it. His logic, persistence and good nature were a significant factor in gradually bringing all the parties on board to our way of thinking.