Tax Considerations in Structuring a Deal

Tax Considerations in Structuring a Deal Guest: Martin Allen, Partner at Kirkpatrick & Lockhart • • • • • Tax considerations in transaction are important in knowing why a deal is done one way or another. To structure a transaction ask what is the legal form pass through entity? - Partnership, S corp., C corp. subsidiary of another corp. - it has income - Income is passed through to the owner (taxed once to the owner). - Profit on sale is taxed to partner not partnership 1986: There is double taxation C Corps: If there is an income, it is subject to operational tax. Then, if it goes to shareholders, they are taxed as well. According to Badge: there is asset acquisition, stock acquisition, and merger. But, Martin thinks there are only 2 kinds: asset acquisition and stock acquisition. When smoke clears, target has disappeared, and buyer has all of the assets. • • • • • • • discussed forward triangular mergers taxable transactions What are tax objective’s of partners Buyer’s objective: acquire assets of a target company with the most beneficial tax attributes as possible. If NBV < fair value, then buyer wants to take it with a stepped-up basis so they can claim tax on this basis Tax sheltered cash discussion The buyer in the transaction wants a stepped-up basis • C-Corp (basic corp.) Example: GM. treated as a separate tax payer. 35% of dividends are taxed. • It’s hard to buy NOL’s around election-time; politicians want to close tax loopholes. • Seller’s (in class he used Gibson as an example) goals - he wants to pay as little tax as possible wants as much money as he can get - may want to defer tax if he wants to pay for it If Gibson set up a C corp. and Allen wants to buy it…what happens? Allen refers to example 1: He states, what if Gibson doesn’t want to sell assets, but stocks? - Buyer’s investment is $13,000. Gibson gets $11,000- 10,000 + tax (.15). - Gibson wants $9500 • Stand alone corporation: not part of a group Allen talked about how to value corporations? What should you consider? • • • • • one way to value equity, is after tax-value Suppose someone wants to buy a subsidiary of United Tech. Co. - Introduces possibility of getting a stepped-up tax basis (to get rapid depreciation) when you buy assets. Buyer will allocate a lot for depreciation and a little to goodwill It is difficult for subsidiary to sell asset by asset by asset. It would be easier to buy stock of the subsidiary. (assume depreciation bookvalue = 0) • Section 338: Election: - When a corporate buyer buys a C-Corp, the seller and the buyer can elect to treat the transaction as an asset transaction even though the buyer bought the stock. - Selling Corp. would have generated a profit on the sale (as if it sold assets) - This election would make sense if subsidiary had way to absorb the gain • Section 338 – H-10 Election - The deemed asset sale is treated as it happened the moment before the sale. - Therefore, UT pays tax, not subsidiary. - UT is in the same position had it sold stocks (illustrated in Example 2) • • Forward triangular asset transaction: no need for Section 338. Reverse Triangular merger: has more limitations than a direct merger. Non-Taxable reorganizations: • entitled to special tax things • Allowed to swap tax, without paying current tax... “carry-over” basis • there is no step-up (swap parent stock for business’s asset) • sellers don’t’ get cashÆ they get stock for the new stock or promissory notes called “boot” • ABC (companies) - A: assets for stock subject to liabilities B: stock for stock swayÆi.e. tender offer C: merger forward or direct or triangular 1.) Limitation to “boot” in C corp. • if you swap target’s assets for stock + cash then this treated as “boot” • boot makes it hard to qualify a transaction 2.) substantially “all” requirements there will be buyers that may not want to buy al l of the “target” • By not taking B, you lost qualification but buyer buys A and B, not C of the target. • • • • Direct mergers are the most permissive. Target mergers entice buyers. 50% needs to be stock and 50% needs to be cash Gain is realized at the extent of the boot that is received. B-reorganization: * Share stock of B for T * Only voting stock can be used (this is a tax problem, so no boot can be used) * Difficult to do with a widely-held company, because you may not get all of the shares. * This is a tender offer (usually followed by a squeeze-out merger to get 20%) * You need 80%