Buying and Selling a Business: Mergers and Acquisitions: Tax Issues

A sale or acquisition of a company may take the form of a tax free reorganizations or a taxable transactions. How should we analyze, structure, and negotiate the tax provisions when a client wants to sell a company?

The first question will almost always be whether the seller can avail itself of the tax-free provisions of the Internal Revenue Code of 1986, as amended.  “Chunking up” a bit, the bigger issue to be considered is the tax sensitivity of the buyers and sellers.  As odd as that sounds at first, a seller may have substantial losses available to offset any gains. It may be a sale at a loss. The seller may be foreign. Similarly, on the buy side, the business deal might totally overshadow any tax consequences. The size of the target might be inconsequential to the buyer, or the buyer simply might not care about getting extra tax basis. In those cases, there is not much for a tax lawyer to do but sit on the sidelines and avoid penalties to wholly avoidable taxes on the transaction. The vast majority of sale transactions however will require a determination of whether the deal can be structured to be wholly or partially tax-free.

Although the tax-free reorganization provisions are not elective, it is possible to change the economics and structure of a transaction to fit within the tax-free provisions if that provides the best result to the parties.  Often, getting the business to fit within the tax-free provisions will greatly increase the complexity of the transaction, so a client’s desire to reduce taxes must be balanced against their tolerance for complexity.  If the buyers and sellers are more sensitive to avoiding complexity than to tax concerns, and the reorganization will make the transaction complex, the analysis stops there.  If tax is more of an issue than complexity, the use of the tax-free reorganization provisions must be considered.

For more information on mergers and acsuisitions, and the tax aspects of purchases and sales of businesses, see RoyseLaw Mergers and Acquisitions, RoyseLaw Tax, Recent M&A Transactions, and blog posts at Royse University M&A, and Royse University Tax. Additional materials on mergers and acquisitions can be found at our blog posts at Franchise Tax Board Audits Sale of S Corp in 338(h)(10) Transaction, Corporate Reporting of Transactions Affecting Basis, M&A Trends and Qualified Small Business Stock. See M&A slides at SlideShare.