Asset Sale vs. Stock Sale: Tax Considerations, Advanced Drafting and - PowerPoint PPT Presentation

Presenting a live 90-minute webinar with interactive Q&A Asset Sale vs. Stock Sale: Tax Considerations, Advanced Drafting and Structuring Techniques for Tax Counsel TUESDAY, AUGUST 2, 2016 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Matthew J. Donnelly, Esq., Skadden Arps Slate Meagher & Flom , Washington, D.C. Paul Schockett, Counsel, Skadden Arps Slate Meagher & Flom , Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 . NOTE: If you are seeking CPE credit, you must listen via your computer — phone listening is no longer permitted.

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Asset Sale vs. Stock Sale: Tax Considerations, Advanced Drafting & Structuring Techniques for Tax Counsel August 2016

Presenters  Matthew Donnelly, Skadden Arps, Washington, D.C.  Paul Schockett, Skadden Arps, Washington, D.C. 6

Matthew Donnelly  Matthew Donnelly, (202) 371-7236 (matthew.donnelly@skadden.com)  Matt’s practice focuses on the domestic and international tax aspects of mergers, acquisitions, dispositions, joint ventures, restructurings and financings. 7

Paul Schockett  Paul Schockett, (202) 371-7815 (paul.schockett@skadden.com)  Paul advises public and private companies on a broad range of U.S. federal income tax issues, with particular focus on mergers, acquisitions, dispositions, joint ventures, debt and equity offerings, bankruptcy restructurings and tax-equity financings. 8

Outline  Forms  Seller’s considerations  Buyer’s considerations  Impact of the target company’s characteristics  Effect of elections under IRC § 338, § 336(e) and Treas. Reg. 1.1502-36(d)  International tax and state/local tax considerations  Contractual protections 9

Scope  Taxable acquisitions  Not qualifying as “reorganizations” under IRC § 368  Private (or closely-held) deals  Target is a subsidiary or an entity held by a small or limited number of equityholders  Greater flexibility in structuring 10

Forms 11

Forms: Asset Sales  Asset purchase agreement (i.e., APA)  LLC purchase agreement (e.g., MIPSA)  Check-the-box rules (Treas. Reg. § 301.7701-1 et seq.)  Rev. Rul. 99-5 & Rev. Rul. 99-6  Forward merger  See Rev. Rul. 69-6 12

Forms: Stock Sale  Stock purchase agreement (i.e., SPA)  Reverse subsidiary merger  See Rev. Ruls. 67-448 & 90-95 13

Seller’s Considerations 14

Seller’s Considerations: Asset Sale  Income Tax Consequences  Ordinary income and/or capital gain (or loss) on the sale of assets  See, e.g., IRC §§ 1221, 1231, 1245, 1250  ITC recapture 15

Seller’s Considerations: Asset Sales  Income Tax Consequences: “Single” or “Double” Tax  If the Seller is an individual, taxable as a “pass - through” or “flow - through” entity or under a preferential regime, proceeds generally only taxable once (at the member/shareholder level at individual rates)  See, e.g., subchapters K, M, S & T  If the Seller is taxable as a corporation for U.S. federal tax purposes:  Income tax imposed on the corporation (IRC § 11)  After-tax proceeds taxable again at the individual level upon distribution to shareholders (IRC § 301) 16

Seller’s Considerations: Asset Sales  Other tax considerations  FIRPTA  Real estate transfer taxes  Sales taxes 17

Seller’s Considerations: Stock Sale  Income Tax Consequences  Sellers generally will recognize capital gain or loss on the sale of target stock  Preferential rates may apply to non-corporate sellers with a holding period of more than one year  Capital losses may be subject to limitations  But see IRC §§ 338(h)(10), 336(e) (discussed below)  FIRPTA 18

Seller’s Considerations: Asset Sale vs. Stock Sale  For certain sellers, stock sale generally results in a “single” level of income tax  Higher threshold to application of FIRPTA to stock sale  However, as discussed below, depending on the target’s basis in its assets, sellers may prefer an asset sale to claim a larger loss  See Treas. Reg. § 1.1502-36(d)  State real estate transfer taxes & sales taxes generally inapplicable to stock sales 19

Buyer’s Considerations 20

Buyer’s Considerations: Asset Sale  Income Tax Consequences  Cost basis in assets  See IRC § 1012  Depending on composition of assets, step-up in tax basis can give rise to incremental increase in depreciation & amortization deductions for the buyer  See IRC §§ 167, 197  Purchase price allocation?  See IRC § 1060 21

Buyer’s Considerations: Stock Sale  Income Tax Consequences  Cost basis in stock  See IRC § 1012  No cost recovery deductions with respect to stock basis  Stock basis available to offset future stock sale  But see IRC §§ 338(h)(10), 336(e) (discussed below) 22

Buyer’s Considerations: Asset Sale vs. Stock Sale  Buyers generally prefer asset sales because asset basis can be recovered currently via depreciation/amortization deductions  However, as discussed below, depending on the target’s tax attributes, buyers may prefer a stock sale  But see Treas. Reg. § 1.1502-36(d) 23

Impact of Target’s Tax Characteristics 24

Target Tax Characteristics  If the buyer acquires the stock of a corporate target, the target’s tax attributes generally survive subject to certain limitations  The availability of these attributes to offset income of the target (and other income of the purchaser) after the acquisition are a critical consideration in whether a buyer may seek to structure a transaction as a stock sale or an asset sale  Similarly, in auction contexts, sellers may anticipate an assignment of value to the target’s attributes and invite the buyers to specifically allocate consideration to such tax attributes 25

Target Tax Characteristics: Examples  Net operating losses (NOLs) & NOL carryovers  See IRC § 172  Capital losses & capital loss carryovers  See IRC § 1212  Business credit & foreign tax credit carryforwards  See IRC §§ 27, 39  Minimum tax credits  See IRC § 53  Tax basis 26

Target Tax Characteristics: Limitations in General  The availability of tax attributes after a stock acquisition may be limited under IRC §§ 382 and 383  Net operating losses and net operating loss carryovers are subject to limitation under IRC § 382  Business credits, minimum tax credits, net capital losses and foreign tax credits are subject to limitation under IRC § 383  In addition, if the principal purpose for which such acquisition was made is evasion or avoidance of Federal income tax, tax attributes may be subject to limitation under IRC § 269  Further, anti-abuse doctrines developed under case law may also apply to limit a target’s attributes 27