The IRS has assessed $4 billion in taxes, penalties, and interest on Yum! Brands. The issue stems from a tax-deferred reorganization in 2014. Yum! Brands is now suing to prevent the IRS from collecting these funds. M&A is often among the most complicated tax issues large corporations face, which can often lead to uncertainty and scrutiny from the IRS. In this article, I discuss the Yum! Brand corporation, what happened in 2014, and why they are facing such a steep tax penalty now over a decade later.
What Is The Yum! Brands Corporation?
Yum! Brands is the parent company of KFC, Taco Bell, Pizza Hut, and Habit Burger & Grill. As noted by The Washington Post, this corporation spun off from PepsiCo in 1997 to become among the largest set of restaurant chains in the United States and the world. While it currently features those three staples, the corporation has also previously held other chains, such as A&W and Long John Silvers.
Yum! Brands has been known to be innovative by having combination restaurants. In these situations, customers can order from a KFC or Taco Bell (or both) at the same location. What makes Yum! Brands particularly impactful is their international appeal. As stated on the Yum! Brands website, the brands total over 61,000 locations and can be seen in 155 countries. According to CNN, KFC has blossomed to become an international staple in countries like Japan, where people often have KFC as their Christmas dinner.
Yum! Brands is also no stranger to tax-related news. In early 2025, the company announced a different restructuring. While the company is famously headquartered in Louisville, Kentucky (hence, Kentucky Fried Chicken), Fortune reported that it will be relocating to Plano, TX, due to, among other things, taxes. Kentucky is a state that levies a corporate income tax (5% in 2025). Meanwhile, Texas famously has a 0% tax rate on corporate profits. Individual income tax is also not levied in Texas. Newsweek suggests that Texas has become a bit of a tax haven for new corporate headquarters such as Tesla, Toyota, Charles Schwab, Chevron, and now Yum! Brands.
Yum! Brands 2014 Reorganization
Prior to 2014, Yum! Brands was made up of separate legal entities based on brand and region. For example, there were separate legal entities for KFC Asia and KFC Europe. According to court filings, On November 30, 2013, Yum! Brands publicly announced a corporate reorganization. In this reorganization, the company would no longer be broken out into segments based on geography. Instead, it would focus its organization based on brands (i.e., KFC, Taco Bell, and Pizza Hut). It would also have separate divisions for China and India. The goal of this reorganization was to drive growth.
To help facilitate the reorganization, the new subsidiaries issued stock in exchange for stock in the previous subsidiary. This stock for stock reorganization often falls under the Internal Revenue Code Section 368(a)(1)(B), which allows for the acquisition of a corporation solely in exchange for all or part of its voting stock. As long as all of the conditions are met, the Yum! Brand legal entities can exchange the stock without recognizing a gain on the appreciated value of the stock. The conditions for this type of reorganization are as follows:
- Stock in the acquiring corporation must be exchanged solely for all or a part of its stock in the target entity
- The stock exchanged must be voting stock
- Immediately after the acquisition, the acquiring corporation has to have 80% or more of the ownership of the target corporation
Reorganizations under Section 368 are valuable for a company like Yum! Brands because it wishes to restructure the company’s organization to enhance future profits. In a normal transaction where Yum! Brands were selling its stock to another company, Yum! Brands would have a gain (or loss) on the appreciated (depreciated) value of the stock. However, Section 368 allows companies to meet certain conditions to defer the gain to a future period. Importantly, companies still have to recognize a gain on the stock’s appreciated value, but this gain will not typically happen until the company ultimately disposes of it. In this case, Yum! Brands thought that the conditions under Section 368(a)(1)(B) were met, which would defer the gain, allowing the reorganization to make more sense from a financial perspective.
The IRS Versus Yum! Brands
In Yum! Brand’s 2024 10-K financial statements, the company notes the following:
“We received a Revenue Agent’s Report that includes a proposed adjustment for the 2014 fiscal year relating to a series of reorganizations we undertook during that year in connection with the business realignment of our corporate and management reporting structure along brand lines. While we disagree with the position of the IRS and intend to contest it vigorously, an unfavorable resolution of this matter could have a material, adverse impact on our Consolidated Financial Statements in future periods”
As reported by Bloomberg Tax, this disagreement comprises over $4 billion dollars in damages: the $2.1 billion in taxes that the IRS believes Yum! Brands should have paid during their reorganization in 2014, $418 million in underpayment penalties and over $1.5 billion in interest on the money that has not yet been paid to the taxing authority. $4 billion is a large assessment for any firm. However, to put it into context, Yum! Brands in 2024 had a pre-tax income of $1.9 billion and paid income taxes of $414 million on that income. Thus, a tax bill of over $4 billion is astronomical for even a company of this size.
NRN reports that the disagreement stems from Yum! Brands believe to have met all of the requirements under Section 368 for the reorganization to be tax-deferred, whereas the taxing authority believes that these matters were not all addressed and initiates billions of dollars of income by way of a sale of appreciated value of stock. NRN also reports that Yum! Brands has taken this matter to court and appeals court but was unsuccessful.
In turn, Law360 reports that Yum! Brands have taken the IRS to court to sue them over the collections of this $4 billion. While the matter is still uncertain, many in the M&A tax space continue to watch this saga unfold since it represents a significant assessment being levied against some of the U.S.’s most recognizable restaurant brands.
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