Cost Free Treatment Under Irc Section 368 Essay

1405 WordsOct 6, 20166 Pages
J. Tax Deferred Reorganizations “Tax-free” M&A transactions are considered “reorganizations” and are similar to taxable transactions except that in reorganizations the acquirer uses its stock as a significant portion of the consideration paid to the seller rather than cash or debt. Four conditions must be met to qualify a transaction for tax-free treatment under IRC Section 368: 1) Continuity of ownership interest – at least 50% of the consideration is acquired stock (although transactions with as little as 40% stock consideration have qualified for tax-free treatment); 2) Continuity of business enterprise – the acquirer must either continue the target’s historical business or use a significant portion of the target’s assets in an existing business for 2 years after the transaction; 3) Valid business purpose – the transaction must serve a valid business purpose beyond tax avoidance; 4) step-transaction doctrine – the transaction cannot be part of a larger plan that, taken in its entirety, would constitute a taxable acquisition. Reorganizations, while not generally taxable at the entity level, are not completely tax-free to the selling shareholders. A reorganization is immediately taxable to the target’s shareholders to the extent they receive non-qualifying consideration, or “boot”. Also, tax on acquirer stock received by target shareholders as consideration is deferred rather than avoided altogether. IRC Section 368 recognizes three types of corporate acquisition

More about Cost Free Treatment Under Irc Section 368 Essay

Open Document