Gastar Exploration – IRS is demanding the payment of a toll charge in exchange for giving a continuance ruling

Gastar Exploration, which is an Alberta corporation with a U.S. natural gas business, is proposing to continue to Delaware pursuant to an Alberta Plan of Arrangement.  The continuance is regarded from a U.S. tax perspective as entailing a transfer by Gastar of all its assets to the new Delaware corporation (Gastar Delaware), followed by a distribution by Gastar of Gastar Delaware to its shareholders.  This distribution step is potentially problematic as Gastar Delaware will be a United States real property holding company for FIRPTA purposes.

The IRS has ruled that Gastar will qualify for an exemption from the FIRPTA tax that otherwise would be payable on this distribution if Gastar pays a "toll charge" equal to the FIRPTA taxes that would have been imposed on its shareholders since its incorporation 10 years ago had it been a domestic corporation all along - plus interest.  Management estimates that this toll charge will be only around $500,000 (the Gastar share price has been in a somewhat steady decline from $25 10 years ago to $2.50 today.)

CRA likely would not engage in this sort of horse trading given the perceived strictures of the Cohen and Galway doctrine.

Notwithstanding a deemed disposition of all its property (s. 128.1(4)(b)) and an exit tax calculated at 5% of NAV minus PUC (s. 219.1), management does not anticipate any material Canadian income tax on the continuance.

Neal Armstrong.  Summary of Gastar Exploration Proxy Statement under Other – Continuances.