Stock Or Asset Acquisitions : Basic Tax Implications

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Stock or Asset Acquisitions: Basic Tax Implications
I. INTRODUCTION
Tax rules in transactions are complex, always changing, and often counterintuitive. Minor details from a business perspective can have serious tax consequences. Further, choosing the wrong transaction structure can lead to one party achieving a significant tax benefit at the other party’s expense or both parties being significantly worse off. This paper will address the basic federal tax rules in a stock or asset transaction but due to the multitude of possible tax issues, it will not include every exception to these general rules.
Part II of this paper will discuss the considerations involved in deciding whether a transaction should be a taxable or tax-free
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II. TAX-FREE VS. TAXABLE ACQUISITIONS
A. Is a Tax-Free Acquisition Possible?
For a tax-free reorganization to be possible, two requirements must be met. First, at least 40% of the total consideration paid to Shareholders must be stock of the Acquirer. In other words, the nonstock consideration (“boot”) cannot exceed 60% of the total consideration. If the boot exceeds 60%, there cannot be a tax-free reorganization. However, a similar result may be possible under a 351 merger .
Second, the Target must be a corporation for tax purposes. If the Target is a partnership, a tax-free reorganization is not possible. It is also not possible for a partnership to transfer assets to a new corporate Target, and then have those assets, as part of the same plan, be used in a tax-free reorganization with Acquirer. Under those facts, the “step transaction” doctrine would treat those assets as being transferred directly from the partnership to Acquirer in a taxable transaction and not as part of a tax-free reorganization.
On the other hand, a tax-free reorganization may be possible if the Target is a limited liability company (LLC) that previously elected to be treated as a corporation for tax purposes and the election was not selected pursuant to a plan of reorganization. Similarly, if the Target is a “S” corporation, a tax-free reorganization may be available.
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