U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE COMBINATION
The following discussion is a general summary of the material U.S. federal income tax consequences of the exchange by U.S. holders (as defined below) of Zynga common shares for shares of Take-Two common stock in the combination.
The following discussion does not address any aspects of U.S. taxation other than federal income taxation, nor does it address any Medicare contribution tax, non-income or other taxes or any foreign, state or local tax consequences of the combination.
WE URGE YOU TO CONSULT YOUR OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO YOU OF THE COMBINATION, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS IN LIGHT OF YOUR PARTICULAR CIRCUMSTANCES.
This discussion addresses only U.S. holders of Zynga common shares who hold that stock as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment).
For these purposes a “U.S. holder” is any beneficial owner of Zynga common shares that is for U.S. federal income tax purposes:
| • | an individual citizen or resident of the United States; |
| • | a corporation (or any other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; |
| • | an estate the income of which is subject to U.S. federal income taxation regardless of its source; or |
| • | a trust that (i) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. |
This discussion does not address all aspects of U.S. federal income taxation that may be relevant to you in light of your particular circumstances or if you are subject to special rules (including, for example, tax-exempt organization, governmental organization, tax-qualified retirement plan, controlled foreign corporation, passive foreign investment company, financial institution, dealer in securities, trader in securities that elects mark-to-market treatment, insurance company, mutual fund, person who exercises appraisal or dissenters’ rights, person subject to the alternative minimum tax, regulated investment company, real estate investment trust, partnership or other pass-through entity, person whose Zynga common stock is “qualified small business stock” within the meaning of Sections 1045 or 1202 of the Code, person who holds 5% or more of the Zynga common shares, person who holds Zynga common shares as part of a hedging or conversion transaction or as part of a short-sale or straddle or through a partnership or other pass-through entity for U.S. federal income tax purposes, individual who is a U.S. expatriate or former citizen or long-term resident of the United States, person that has “functional currency” other than the U.S. dollar, person subject to special tax accounting rules as a result of any item of gross income with respect to the stock being taken into account in an applicable financial statement or a person who acquired Zynga common shares pursuant to the exercise of an option or otherwise as compensation). This discussion is based on the Code, applicable Treasury regulations, administrative interpretations and court decisions, each as in effect as of the date of this joint proxy statement/prospectus and all of which are subject to change, possibly with retroactive effect. This discussion is not binding on the Internal Revenue Service (the “IRS”) or any court, so there can be no certainty that the IRS will not challenge the tax treatment discussed below. If the IRS were to successfully challenge the tax consequences of the combination, the tax consequences could be different from those set forth in this discussion.
If a partnership (or an entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds Zynga common shares, the tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partners of partnerships holding Zynga common shares should consult their own tax advisors.
General
Take-Two and Zynga intend for the combination to be treated as a “reorganization” within the meaning of Section 368(a) of the Code. It is a condition to Take-Two’s obligation to complete the combination that Take-Two receives an opinion from Willkie Farr & Gallagher LLP, counsel to Take-Two, to the effect that the combination will be treated as a reorganization within the meaning of Section 368(a) of the Code. It is a condition to Zynga’s obligation to complete the combination that Zynga receives an opinion from Wilson Sonsini Goodrich & Rosati, special counsel to Zynga, to the effect that the combination will be treated as a reorganization within the meaning of Section 368(a) of the Code. One of the requirements that must be satisfied in order for the combination to qualify as a reorganization is the “continuity of interest” test, which generally would be satisfied if the stock consideration received in the Merger represented at least 40% of the value of the total merger consideration, determined based on the value of the Take-Two common stock on the Closing Date. These conditions may not be waived by Zynga or Take-Two after receipt of the approval of the combination by the stockholders of Zynga and Take-Two, respectively, without further stockholder approval; accordingly, if such opinions are not delivered (including because the “continuity of interest” requirement is not met), the combination may not be completed.
These opinions will be based on customary assumptions and representations from Zynga and Take-Two, as well as certain covenants and undertakings by Zynga and Take-Two. If any of the assumptions, representations, covenants or undertakings is incorrect, incomplete, inaccurate or is violated, the validity of the opinions described above may be affected and the tax consequences of the combination could differ materially from those described in this joint proxy statement/prospectus. Neither Zynga nor Take-Two is currently aware of any facts or circumstances that would cause the assumptions, representations, covenants and undertakings to be incorrect, incomplete, inaccurate or violated.
An opinion of counsel represents counsel’s legal judgment but is not binding on the IRS or any court, so there can be no certainty that the IRS will not challenge the conclusions reflected in the opinions or that a court would not sustain such a challenge. Neither Zynga nor Take-Two intends to obtain a ruling from the IRS on the tax consequences of the combination. If the IRS were to successfully challenge the “reorganization” status of the combination, the tax consequences would be different from those set forth in this joint proxy statement/prospectus.
Tax Consequences of the Combination
Assuming the receipt and accuracy of these opinions, you will generally recognize gain (but not loss) in an amount equal to the lesser of (1) the amount of gain realized (i.e., the excess, if any, of the sum of the amount of cash and the fair market value, as of the effective time of the merger, of the Take-Two shares received in the combination over your adjusted tax basis in its Zynga shares surrendered) and (2) the amount of cash received in the combination.
Notwithstanding the above, in certain circumstances, if you actually or constructively own Take-Two shares other than Take-Two shares received pursuant to the combination, the recognized gain could be treated as having the effect of a distribution of a dividend under the tests set forth in Section 302 of the Code, in which case such gain would be treated as dividend income. Because the possibility of dividend treatment depends upon each holder’s particular circumstances, including the application of constructive ownership rules, you should consult your tax advisor regarding the application of the foregoing rules to their particular circumstances.
The aggregate tax basis of any Take-Two shares you received in the combination will be equal to the aggregate adjusted basis of the Zynga common shares surrendered in the combination, reduced by the amount of any cash you received in the combination and increased by the amount of any gain you recognized on the combination (including any portion of the gain that is treated as a dividend as described above). The holding period of any Take-Two shares you received in the combination will include the holding period of the Zynga common shares surrendered in the combination.
If you acquired different blocks of Zynga shares at different times or at different prices, any gain or loss will be determined separately with respect to each block of Zynga common shares and your basis and holding period in your shares of Take-Two shares may be determined by reference to each block of Zynga common shares. You should consult your tax advisor regarding the manner in which cash and Take-Two shares received in the combination should be allocated among different blocks of Zynga common shares and with respect to identifying the bases or holding periods of the particular shares of Take-Two common stock received in the combination.
Any recognized gain will generally be long-term capital gain if your holding period of the Zynga shares surrendered is more than one year at the effective time of the merger. Long term capital gain of certain non-corporate U.S. holders of Zynga common shares, including individuals, is generally taxed at preferential rates.
Information Reporting and Backup Withholding
Payments of cash to you may, under certain circumstances, be subject to information reporting and backup withholding, unless you provide proof of an applicable exemption or furnish your taxpayer identification number, and otherwise comply with all applicable requirements of the backup withholding rules. Any amounts withheld from payments to you under the backup withholding rules are not additional tax and will be allowed as a refund or credit against your United States federal income tax liability, provided the required information is timely furnished to the IRS.
