TAX ASPECTS OF BUYING OR SELLING A BUSINESS. Jim Browne SP Transactional Academy (January 2014)

Transcription

1 TAX ASPECTS OF BUYING OR SELLING A BUSINESS Jim Browne SP Transactional Academy (January 2014)

2 Topics Transaction considerations Taxable asset acquisition Taxable stock acquisition Tax-free reorganizations Acquisitions using disregarded entities 2

3 Topics Transaction considerations Taxable asset acquisition Taxable stock acquisition Tax-free reorganizations Acquisitions using disregarded entities 3

4 Transaction Considerations Form of transaction Asset purchase: specified assets/liabilities acquired Stock/equity purchase: all assets/liabilities acquired Merger: Traditional: one survivor; all assets/liabilities acquired Divisive: multiple survivors; specified assets and liabilities in each survivor (TBOC ) Combination 4

5 Transaction Considerations Form and timing of consideration equity versus cash or other property Deferred, contingent, or escrowed payments Assumption of liabilities Like-kind exchange 5

6 Transaction Considerations Form of transaction and consideration will impact tax consequences Amount, timing, and character of Seller gain recognition Amount and timing of stepped-up tax basis Transfer taxes Other 6

7 Transaction Considerations Other tax sensitive matters Purchase price allocation Shareholder assets, including goodwill Employment/consulting agreements and covenants not to compete Termination/transition of compensation plans Transition services (tax compliance) Tax accruals and tax indemnity Tax withholding certificates Transfer taxes Book versus tax accounting (e.g., contingent consideration and transaction costs) Other 7

8 Topics Transaction considerations Taxable asset acquisition Taxable stock acquisition Tax-free reorganizations Acquisitions using disregarded entities 8

9 Taxable Asset Acquisition Purchase of assets Transaction Result Cash Assets Cash? Retained Assets and Liabilities Assets and Assumed Liabilities 9

10 Taxable Asset Acquisition = C corporation recognizes gain or loss on asset sales Ordinary income to extent of ordinary assets Can use NOLs and other tax attributes to mitigate recognize gain on distribution of sale proceeds by has FMV basis in assets acquired 10

11 Taxable Asset Acquisition = S corporation recognizes gain or loss on asset sales, but passed through to increase basis in their stock by gain passed through. Distributed cash taxable only if > stock basis has FMV basis in assets acquired = LLC/Psp Same as S corporation 11

12 Taxable Asset Acquisition Forward merger Transaction Result Cash Merger Cash and Assets and Liabilities 12

13 Taxable Asset Acquisition Divisive Merger Transaction Result Cash Merger Cash; Retained assets and liabilities Acquired assets and liabilities 13

14 Taxable Asset Acquisition Forward subsidiary merger Transaction Result Cash Cash Merger Sub Sub assets and liabilities 14

15 Taxable Asset Acquisition Forward merger Same tax consequences as asset acquisition, except all assets/liabilities transfer and terminates Divisive Merger Same tax consequences as asset acquisition Selected assets/liabilities transfer by operation of law survives and retains unwanted assets/liabilities Forward subsidiary merger Similar to forward merger, but treated as dropping s assets/liabilities into sub 15

16 Topics Transaction considerations Taxable asset acquisition Taxable stock acquisition Tax-free reorganizations Acquisitions using disregarded entities 16

17 Taxable Stock Acquisition Purchase of stock (equity) Transaction Result Cash Stock Cash 17

18 Taxable Stock Acquisition Reverse subsidiary merger Transaction Result Cash Cash Merger Sub 18

19 Taxable Stock Acquisition Reverse subsidiary merger Treated same as stock purchase Used to squeeze out minority shareholders Most common form for acquiring the stock of a company whose stock is publicly traded or widely held 19

20 Taxable Stock Acquisition Purchase of stock (equity) Transaction Result Cash Stock Cash 20

21 Taxable Stock Acquisition = C corporation has no gain or loss shareholders recognize gain on receipt of sale proceeds from Gain generally all capital gain has FMV basis in stock, but has carryover basis in assets tax attributes (NOLs) survive, but may be limited 21

22 Taxable Stock Acquisition = S corporation (SC) Generally: same tax consequences as C corp. Exception: recapture of IDCs and depletion ( 1254) = LLC/Psp shareholders have capital gain except to extent of s hot assets, which generate ordinary income has stepped up tax basis if Section 754 election is made by 22

23 Taxable Stock Acquisition Section 338(g) election Sale of stock is deemed, for tax purposes only, to be a sale of assets (from old to a hypothetical new ) and liquidation of old Available if (i) = corporation, (ii) is an 80% owned corporate subsidiary or S corporation, and (iii) 80% stock purchase Rarely advisable due to double tax Seller has stock sale gain has deemed asset sale gain; tax liability generally falls on buyer (as new owner of ) Consider if has large NOL carryforward 23

24 Taxable Stock Acquisition Section 338(h)(10) election Available if Seller and file a consolidated federal return, are affiliated corporations, or is an S corporation Key difference from a 338(g) election: actual sale of stock is ignored for tax purposes, so no double tax Rarely inadvisable 24

25 Taxable Stock Acquisition Section 338(h)(10) election Deemed Transaction* Result Cash shareholders shareholders Cash Cash Assets and Liabilities New New *Actual transaction is purchases stock from shareholders. 25

26 Taxable Stock Acquisition Section 336(e) election (new in 2013) Similar to 338(h)(10) Election, but buyer need not be a corporation Two categories: Corporation or distributes >80% control of a subsidiary S corporation shareholders sell >80% of the S corporation Effect is deemed to sell all of its assets to an unrelated third party and then liquidate On the next day, New is deemed to purchase all of the assets from the unrelated third party Stock sale gain is disregarded Election is made by Seller and 26

27 Taxable Stock Acquisition Comparison to 754 An alternative to a stock purchase with a 338(h)(10) or 336(e) election is acquiring partnership/llc equity and using a Section 754 election to effect a step up in the tax basis of the entity s assets A 754 election is more flexible: need not be a corporation* No 80% qualified stock purchase threshold No tax on equity retained by sellers * Not applicable if Section 336(e) applies 27

28 Topics Transaction considerations Taxable asset acquisition Taxable stock acquisition Tax-free reorganizations Acquisitions using disregarded entities 28

29 Tax-Free Reorganizations General considerations Involves only corporations and requires issuance of qualifying consideration (stock) Tax effects Generally no entity level taxes recognize gain only to extent of nonqualifying consideration (a/k/a boot ). Remaining gain is deferred (not eliminated) generally does not obtain a tax basis step up in assets 29

30 Tax-Free Reorganizations Application = C corporation; low stock basis; high asset basis Internal reorganization of consolidated subsidiaries Spin-off C corporation subsidiary (divisive D reorganization) Bankruptcy reorganizations ( G reorganization) 30

31 Tax-Free Reorganizations Types of tax-free reorganizations A: statutory merger B: stock for stock C: assets for stock D: assets for stock E: recapitalization F: change of identity, form, or place organized G: bankruptcy reorganization 31

32 Tax-Free Reorganizations A reorganization (statutory merger) Transaction Result Stock and Merger Assets Assets Assets Assets 32

33 Tax-Free Reorganizations A reorganization (statutory merger) Voting or nonvoting stock (other than nonqualified preferred stock) can be used Boot (cash or other property) must be ~60% of total consideration. Each Shareholder recognizes gain to the extent of boot received. Allows for: Cash option merger Exchange offer followed by cash squeeze out merger Limitations on selling stock to or related party 33

34 Tax-Free Reorganizations Triangular A reorganizations Reverse or (a)(2)(e) Forward or (a)(2)(d) Merger Merger Sub Merger Merger Sub Result and Result and Merger Sub 34

35 Tax-Free Reorganizations Triangular A reorganizations Purpose Avoid board/shhr approval of Avoid exposing business to liabilities Reverse subsidiary merger survives Treated as stock purchase (triangular B ) Requires 80% voting stock consideration Forward subsidiary merger terminates Treated as asset purchase (triangular C ) Requires ~40% stock consideration 35

36 Tax-Free Reorganizations B reorganization (stock for stock) Transaction Result Stock and Stock 36

37 Tax-Free Reorganizations B reorganization (stock for stock) Must acquire control of Control = stock having 80% of total voting power, plus 80% of total number of each class of non-voting stock ( vote and value ) Consideration is solely voting stock of Reverse subsidiary merger Same effect without solely voting stock limit If solely voting stock is used, qualifies as B reorg. 37

38 Tax-Free Reorganizations C reorganization (assets for stock) Transaction Result and Stock Assets and Assets 38

39 Tax-Free Reorganizations Triangular C reorganization Transaction Result and Stock Assets Sub Sub Assets 39

40 Tax-Free Reorganizations C reorganization (assets for stock) Must acquire substantially all s assets IRS definition = 70% of s gross asset value or 90% of s net asset value Generally solely for voting stock Boot relaxation rule: At least 80 percent of s gross asset value (including retained assets) is acquired for voting stock; assumed liabilities = cash must liquidate 40

41 Tax-Free Reorganizations C reorganization (con t) D reorganization overlap C reorganization applies if stock received by does not constitute control of D reorganization applies if obtains control Forward merger or forward subsidiary merger Same general effect as C reorg. or triangular C reorg. C reorg. used if has minor unwanted assets or has unwanted liabilities (NB: divisive merger available in Texas) 41

42 Tax-Free Reorganizations D reorganization (assets for stock) Non-Divisive D reorganization Substantially all Distributing assets transferred to Controlled Distributing receives 50% control of Controlled Distributing liquidates Divisive D reorganization Less than substantially all assets transferred Distributing receives 80% control of Distributing generally does not liquidate 42

43 Tax-Free Reorganizations Acquisitive D reorganization Transaction Result Stock Assets 50% and Assets 50% 43

44 Tax-Free Reorganizations Divisive D reorganization SPIN-OFF Distributing Transaction Controlled Stock Distributing Transferred Assets Controlled Distributing Retained Assets Result Distributing Controlled Transferred Assets 44

45 Tax-Free Reorganizations Divisive D reorganization SPLIT-OFF Transaction Result Distributing Controlled Stock Distributing Transferred Assets Controlled Distributing Distributing Retained Assets Distributing Controlled Transferred Assets 45

46 Tax-Free Reorganizations Divisive D reorganization SPLIT-UP Transaction Result Distributing Distributing Distributing Controlled Stock Distributing Controlled 1 Controlled 1 Controlled 2 Transferred Assets Controlled 2 Transferred Assets Transferred Assets 46

47 Tax-Free Reorganizations E reorganization (recapitalization) Exchange of stock or securities of a corporation for other stock or securities of the corporation F reorganizations (change in form, etc.) A mere change in identity, form, or place or organization of one corporation G reorganizations (bankruptcy) Transfers of assets under bankruptcy plan 47

48 Tax-Free Reorganizations Strategies to avoid boot limitations Horizontal double dummy merger National Starch rollover Stock repurchase transactions Partnership 48

49 Tax-Free Reorganizations Horizontal Double Dummy Cash and Stock Newco Stock Merger Sub 1 Sub 2 Merger Result and Newco 49

50 Tax-Free Reorganizations Horizontal Double Dummy Tax consequences are deemed to contribute their and stock to Newco for Newco stock and cash (boot) Transaction qualifies as a tax-free 351 transaction because property transferors own >80% of Newco stock immediately after the transaction gain is taxable only to extent of boot 50

51 Tax-Free Reorganizations Horizontal Double Dummy Also useful when is not a C Corporation Transfer of equity or assets to for cash and stock (<80%) is not tax-free under 351 Compare: simultaneous transfer of stock and cash, and equity or assets, to Newco in exchange for Newco cash and stock (100%) is tax-free under 351 Variation: contributes cash to Newco and simultaneously merges Newco sub into in cash option merger 51

52 Tax-Free Reorganizations Horizontal Double Dummy Key Issues Business purpose: form of transaction not solely an accommodation to shareholders No immediate liquidation of into Newco Rev. Rul Non-qualified preferred stock Alternative structures to avoid vote of shareholders 52

53 Tax-Free Reorganizations National Starch Rollover Public Insiders T Stock Newco Cash, Inc. Merger Merger Co. Result Public Insiders Newco Cash Merger Co. 53

54 Tax-Free Reorganizations National Starch Rollover insiders rollover their stock into Newco stock in a tax-free 351 transaction; other stock acquired in a cash merger (or cash option merger) Newco stock issued to shareholders cannot be non-qualified preferred stock Newco stock issued to shareholders can be exchangeable into stock under certain conditions 54

55 Tax-Free Reorganizations Stock Repurchase Transaction Reverse subsidiary merger using 80% stock (to qualify as a good (a)(2)(e) triangular merger After the merger, does a qualified buyback offer for its stock (Rev. Rul ) Net effect is a tax free reorganization with issuing less than 80% stock consideration (after buyback) 55

56 Tax-Free Reorganizations LLC/Partnership Exchange of assets for LLC stock Treated as non-taxable contribution to capital; generally no limitations on type or quantity of stock generally can t be publicly traded Exchange of assets for boot Seller basis allocated between stock and boot; contrast to gain recognized to the extent of boot rule obtains FMV tax basis to the extent of gain, including gain on subsequent sale of stock Purchase consideration resides in ; may be able to borrow against stock to monetize the nontaxable sale consideration 56

57 Topics Transaction considerations Taxable asset acquisition Taxable stock acquisition Tax-free reorganizations Acquisitions using disregarded entities 57

58 Acquisitions Using Disregarded Entities Common Types of Disregarded Entities Corporate form Qualified subchapter S subsidiary (QSUB) Qualified REIT subsidiary (QRS) Non-corporate form Single member limited liability company (SMLLC) Certain wholly-owned partnerships 58

59 Acquisitions Using Disregarded Entities Forward subsidiary merger into DE (A reorg?) Transaction Result Stock and Merger SMLLC SMLLC 59

60 Acquisitions Using Disregarded Entities Reverse subsidiary merger into DE (B reorg.?) Transaction Result Stock and Merger SMLLC 60

61 Acquisitions Using Disregarded Entities Forward merger into DE (= 721/331) Transaction Result Stock Merger SMLLC LLC Tax treatment = contribution of assets to LLC followed by liquidation Cf. Rev. Rul (situation 2). 61

62 Acquisitions Using Disregarded Entities DE forward subsidiary merger (= failed C?) Transaction Result Parent Stock and SMLLC Merger Sub Sub 62

63 Acquisitions Using Disregarded Entities Acquisition of DE assets (= failed C?) Transaction Result Parent Stock SMLLC Merger Sub Sub 63

64 Summary Taxable asset acquisition Preferred form for (selectivity) Consider divisive merger under Texas law Double taxation if C corporation Taxable stock acquisition No buyer step unless 338(h)(10) applies or is a partnership/llc Seller generally recognizes capital gain, except OI on 338(h)(10) deemed asset sale gain 1254 recapture on sale of S corporation stock OI on partnership/llc hot assets 64

65 Summary Tax-free reorganizations recognize gain only to the extent of boot received; remaining gain is deferred rather than eliminated generally does not obtain a tax basis step up in assets Consider hybrid transactions to avoid boot limitations or obtain step up to extent of gain recognition 65

66 Disclaimers This document is not intended to provide advice on any specific legal matter or factual situation, and should not be relied upon without consultation with qualified professional advisors. Any tax advice contained in this document and any attachments was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under applicable tax laws, or (ii) promoting, marketing, or recommending to another party any transaction or tax-related matter. 66