Presenting a live 90-minute webinar with interactive Q&A M&A Tax Considerations for Buyers and Sellers Evaluating Tax Issues Impacting Negotiation, Structure and Price THURS DAY, APRIL 19, 2012 1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific Today’s faculty features: Brian S . Mast erson, Part ner, Venable , Washingt on, D.C. Michael A. Bloom, At t y, Venable , New Y ork 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 .
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M&A Tax Considerations for Buyers and Sellers April 19, 2012 1:00 – 2:30 pm EDT Brian S. Masterson, Partner Michael A. Bloom, Associate 5
I. Taxable vs. Tax-Deferred Acquisitions 6
Party Objectives BUYER OBJECTIVES SELLER OBJECTIVES • Deduct, Depreciate or Amortize • Capital Gain vs. Ordinary Income the Purchase Price • Tax Deferral • Preserve Tax Attributes (e.g., E&P or NOLs) • Reduce Tax (e.g., single level of taxation) Avoid Contingent Tax Liabilities • • Integrate Target with Buyer’s Tax Structure 7
Taxable vs. Tax-Deferred Acquisitions Tax-Deferred Taxable • Use of stock and limited cash likely • Use of cash and debt for to produce a nontaxable acquisition likely to produce a acquisition. taxable acquisition. • Parties involved must be • Primary tax impact is on the target corporations (C or S). corporation. • Detailed rules apply depending on the form (e.g., sometimes 80% or 100% of consideration must be stock). 8
II. Taxable Acquisitions 9
Asset Sale vs. Stock Sale Stock Sale Asset Sale • Simplicity of Transferring Title • Liabilities Do Not Transfer (Unless Assumed) • Avoid Third-Party Consents Unwanted Assets • • Avoid Transfer Taxes 10
Asset Sale vs. Stock Sale Types of Stock Sales Types of Asset Sales • Sale of Stock • Sale of Assets • Sale of Stock w/ Sec. 338 • Taxable Merger (i.e., Merger w/ Cash Election Consideration) • Taxable Reverse Subsidiary Merger 11
Sale of Assets Step 1: Exchange Step 2: Target Liquidates Buyer Sellers Sellers $$ $$ Acquirer Target Target Description: Direct purchase of assets. Target recognizes gain or loss (including depreciation recapture) on an asset-by-asset basis. Acquirer takes basis in assets equal to acquisition cost in accordance with Sec. 1060. 12
Taxable Merger After Before Buyer Sellers Buyer Sellers $$ $$ Acquirer Target Acquirer Merger Treated as taxable sale of Target’s assets followed by liquidation of Target. 13
Taxable Asset Acquisition Tax Consequences to Target: • 2 Levels of Tax: Target 1. Corporate Level Tax 2. Shareholder Level Tax • Assumed Liabilities = Additional Purchase Price. • Target tax attributes may offset gain. • Installment reporting may be available for Notes. 14
Taxable Asset Acquisition Tax Consequences to Acquirer: Acquirer • Acquirer receives basis step-up. $$ • Target’s tax attributes eliminated. • No liabilities assumed as matter of law (unless Taxable Merger) • Value of the step-up (PV of 35% over depreciable life) < cost of step-up (current tax owed). 15
Taxable Stock Acquisition Before After Acq SHs Sellers Acq SHs Sellers $$ $$ Acquirer Acquirer Target Target Target 16 16
Taxable Stock Acquisition Tax Consequences to Sellers: • One Level of Tax (Shareholders). Sellers • Generally Capital Gain Treatment. • Same Result Whether Target is C or S Corp. • If Seller is a Partnership, gain may be recharacterized to the extent of “hot assets”. 17
Taxable Stock Acquisition Tax Consequences to Acquirer: • No Basis Step-Up. Acquirer $$ • Target retains tax attributes. NOLs and built-in gains/losses will be subject to annual limitation triggered by change of ownership. • For Partnerships, Sec. 754 election can provide Buyer with basis step-up. 18
Section 338 Election Purpose: Allows parties to treat a stock sale as an asset sale for tax purposes. Requirements: Generally available to Acquirer whenever Acquirer purchases (within 12 month period) 80% or more of the stock of an unrelated Target. Tax Consequences: Target shareholders recognized gain (or loss) on the sale of their Target stock, and Target recognizes gain (or loss) on the deemed sale of its assets. Rarely Used: Because the PV of the basis step-up received by Acquirer does not exceed the present tax cost of achieving the step-up, regular Sec. 338 elections are rarely used. Exception for Target with NOLs and Foreign Sellers. 19
Section 338(h)(10) Election Purpose: Same as regular Sec. 338 election but with only single layer of tax. Availability: Same requirements as regular Sec. 338 election except Target must be either (i) member of consolidated group, (ii) member of an affiliated group, or (iii) an S corporation. Tax Consequences: Target is treated as having sold all of its assets to a new Target (owned by Acquirer) and liquidated. No gain or loss is recognized on the deemed liquidation of Target (i.e., only 1 level of tax). Joint Election: Both Sellers and Target must make the election. 20
III. Tax-Deferred Acquisitions 21
Tax-Deferred Acquisitions Special Tax Treatment: A transaction defined as a “reorganization” is subject to special treatment under certain provisions of the Code. • Secs. 361 and 357. A Corporation transferring assets recognizes neither gain nor loss if, pursuant to a plan or reorganization, it receives stock or securities of another corporation that is also a party to the reorganization. • Secs. 354 and 356. Shareholders and creditors of Target who, pursuant to a plan of reorganization, exchange stock or securities for that of another Corporation that is a party to the reorganization recognize no loss, and generally recognize gain only to the extent that other property is received. • Sec. 381. In certain reorganizations, Targets tax attributes (e.g., NOLs) are inherited by Acquirer. 22
Tax-Deferred Acquisitions Requirements: For an acquisition to fall within the definition of “reorganization”, it must meet the statutory requirements under Sec. 368, and also certain judicial and administrative tests. Judicial/Administrative Requirements: Continuity of Interest. • Continuity of Business Enterprise. • Business Purpose. • 23
Tax-Deferred Acquisitions Summary of Tax Consequences: No gain (or loss) on stock or securities exchanged solely for stock or • securities in Acquirer as part of plan of reorganization. Gain recognized to the extent of boot received. No gain or loss on transfer of assets. Assets retain historical tax basis • and holding period (including depreciation recapture potential). Target tax attributes preserved (e.g., NOLs, foreign tax credits, • earnings and profits, etc.) 24
Reorganizations 1. Type A Reorganization (Merger or Consolidation) (Sec. 368(a)(1)(A)). 2. Type B Reorganization (Stock for Stock) (Sec. 368(a)(1)(B)). 3. Type C Reorganization (Asset for Stock) ( Sec. 368(a)(1)(C)). 4. Type D Reorganization (Asset for Stock w/ Control) ( Sec. 368(a)(1)(D)). 5. Type E Reorganization (Recapitalization) (Sec. 368(a)(1)(E)). 6. Type F Reorganization (Change in Form) (Sec. 368(a)(1)(F)). 7. Type G Reorganization (Bankruptcy) (Sec. 368(a)(1)(G)). 25
“A” Reorganization Before After Target SH and Target Acq. SH Acquirer SHs SH Merger Consideration (Stock) Target Acquirer Merger Acquirer Description: Target mergers into Acquirer with Acquirer surviving. Target shareholders receive at least 40% Acquirer stock as merger consideration. 26
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