Advanced Mergers & Acquisitions

Transcription

1 Advanced Mergers & Acquisitions October 8, 2015 Tom Schnellenberger Ice Miller LLP One American Square Indianapolis, Indiana Telephone: (317) (direct)

2 Tax Considerations It s not what you make; it s what you keep...

3 Entity Classifications Corporate Law Sole proprietorship Partnership GP LP LLP LLLP Tax* Disregarded entity (e.g., Form 1040 Schedule C) Single member LLC Q Sub Partnership (Form 1065) GP LP LLP LLLP Multiple member LLC LLC Corporation C Corporation (Form 1120) S Corporation (Form 1120S) * Chart reflects default tax classifications; generally, most entities can elect to be treated as a corporation for tax purposes.

4 Tax Tension Between Buyers & Sellers Buyers want: Basis step-up To pay as little cash as possible To avoid hidden liabilities To inherit favorable attributes (NOLs, credit carry forwards) Sellers want: To conserve cash (pay as little tax as possible) To avoid contingent liabilities To avoid winding up headaches

5 Tax Tension Between Buyers & Sellers (Cont.) Buyers want: To Buy Assets Sellers want: To Sell Stock

6 C Corporation Stock Purchase Shareholders Cash Buyer Stock Seller Capital Gains C Corporation Buyer Basis in Stock

7 C Corporation Asset Purchase Shareholders Buyer Seller See next page Cash Assets C Corporation Buyer Step up in basis more depreciation/amortization

8 Tax on C Corporation Sale of Assets Corporate Tax Cash Sales price of assets Basis in assets Taxable income Tax rate Tax Shareholder Liquidation cash Basis in stock Gain on liquidation Tax rate Tax Net cash $1, $1,000 x 40% 396 (396) $ % 131 (131) $ 473

9 Tax on C Corporation Sale of Stock Sales price of stock Basis in stock Taxable gain Individual rate* Individual tax Net cash Sale $1, % 218 Cash $1,000 (218) $ an increase in cash to the shareholders of $309!! *Assumes long-term capital gain treatment

10 Partnership Acquisition Members/Partners Buyer Interest Interest Partnership/LLC Because of Section 754/743 elections generally (but see anti-churning discussion later) does not matter whether selling assets or interests. But both subject to recapture (ordinary income treatment).

11 Section 754/743 Election Simplified Buyer gets step up = seller gain. Step up allocated based on underlying asset appreciation and amortized/depreciated by buyer. Buyer Partnership/LLC

12 S Corporation Asset Purchase Shareholders Buyer Cash Assets S Corporation Buyer Step up in basis. Seller One layer of tax unless Section 1374 built-in gains/tax applies. Also, recapture and rollover issues.

13 S Corporation Stock Purchase Shareholders Cash Buyer Stock S Corporation Buyer Capital gain unless Section 338(h)(10) or 336(e) election made then may have recapture (more later). Also, beware of Section 1374 built in gain and rollover issue. Seller Can get step up in asset basis if a Section 388(h)(10) or 336(e) election made.

14 IRC Section 338(h)(10) Shareholders 80% or more of shares Cash Corporate Acquirer If elected treated as 100% asset sale. (Note: Non-selling shareholders subject to tax.) S Corporation Buyer gets step-up in basis of assets.

15 IRC Section 336(e) 80% or more of shares Shareholders Cash Non-Corporate Acquirer If elected treated as 100% asset sale. (Note: Non-selling shareholders subject to tax.) S Corporation Buyer gets step-up in basis of assets.

16 Purchase Price Allocation Section 1060 requires that the parties agree to an allocation of the purchase price. Form 8594* used to report the purchase price allocation. * Form 8883 used if a Section 338(h)(10) made.

17 Maximum Income Tax Rates Individual* Corporate Ordinary Income 39.6% 35% ((Including depreciation/amortization recapture Unrecaptured gain on real estate 25% 35% Collectibles 28% 35% Long-Term Capital Gain 20% 35% * May also be subject to Net Investment Income Tax of 3.8%

18 Why Do Private Equity Funds Use Corporate Blockers? Tax-Exempt Foreign Investors UBTI (Unrelated Business Taxable Income) PE Fund ECI (Effectively Connected Income) Income LLC

19 Why Do Private Equity Funds Use Corporate Blockers? (Cont.) Tax-Exempt Foreign Investors No UBTI No ECI PE Fund Dividend C Corporation

20 Rollover Equity

21 How NOT to do it! PE Fund Shareholders Cash Corporation Shares S Corporation

22 How NOT to do it! (Cont.) Shareholders Shares Cash Corporation Former S Corporation

23 Rollover Equity Shareholder Cash 70% of stock PE Fund S Corporation

24 Rollover Equity Shareholder PE Fund 30% 70% C Corporation

25 Rollover Equity Flow Through Alternative Shareholder Stock of Target Holding Company Stock Holding Company Makes S-Corporation Election 100% Target Qsub election

26 Rollover Equity Flow Through Alternative Shareholder Holding Company S-Corporation 100% Target Qsub Conversion Target LLC

27 Rollover Equity Flow Through Alternative Shareholder PE Fund Holding Company (S-Corporation) C Corporation Cash Target LLC Ownership Cash * Treated as a sale of assets Pay attention to IRC Section 704(c) allocation election

28 Rollover Equity IRC Section 197(f)(9) Anti-churning rule. Applies to intangibles owned before August 10, 1993 if own more than 20% of entity.

29 Rollover Equity Section 754/743 Step Up Exception Shareholder 1% Interest Cash Holding Company (S-Corporation) 99% Interest Newco LLC

30 Shareholder Rollover Equity Section 754/743 1% Interest PE Fund Holding Company (S-Corporation) 60% Interest Cash C Corporation 39% Common Interest Target LLC

31 Rollover Equity Shareholder 1% Interest PE Fund Holding Company (S-Corporation) C Corporation 39% Interest Target LLC 60% Interest Entitled to Section 754/743 step up and amortization

32 Issues with Non Pro-Rata Rollovers Shareholder 1 Shareholder 2 20% Wants to Rollover 80% Wants to Cash Out S-Corporation

33 Issues with Non Pro-Rata Rollovers (Cont.) Shareholder 1 Cash Dividend Shareholder 2 Gain allocated pro rata Cash Dividend 20% 80% Cash Redemption S-Corporation 80% Interest in LLC Cash Buyer Cash 80% LLC

34 Options IRC Section 424

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