Presenting a live 110-minute teleconference with interactive Q&A Structuring Tax-Free M&A Deals Navigating IRC 368 and 351 and Selecting the Appropriate Structure TUES DAY, FEBRUARY 4, 2014 1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific Today’s faculty features: Jonathan Golub, Attorney, Royse Law Firm , Palo Alto, Calif. Roger Royse, Attorney, Royse Law Firm , Palo Alto, Calif. Joseph C. Mandarino, Partner, Stanley Esrey & Buckley , Atlanta 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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STRUCTURING TAX-FREE M&A DEALS Royse Law Firm, PC 1717 Embarcadero Road Palo Alto, CA 94303 www.rroyselaw.com Roger Royse Jonathan Golub rroyse@rroyselaw.com jgolub@rroyselaw.com Skype: roger.royse February 4, 2014 IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication, including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.
OVERVIEW • Types of Tax-Free Reorganizations: – Type A – Statutory Mergers, Consolidations & Triangular Mergers – Type B – Stock for Stock – Type C – Stock for Assets – Double Merger – Examples • Requirements of Tax-Free Reorganizations: – Continuity of Interest – Continuity of Business Enterprise (COBE) – Business Purpose – Plan of Reorganization – Net Value Requirement – Special Tests – Step Transaction Doctrine • Consequences of Tax-Free Reorganizations: – Buyer Entity – Target Entity – Target Shareholders 6
TAXABLE VS. TAX FREE • Type of Acquisition Currency – Stock – Securities/Debt – Deferred payments, earn outs – Compensatory • Nature of the Buyers and Seller – Foreign Parties – Tax Attributes of Parties • Shareholder Level Considerations – Tax Sensitivity of Shareholders – Appetite for Complexity & Risk 7
TYPES OF REORGANIZATIONS • Type A – Statutory Mergers and Consolidations • Type B – Stock for Stock • Type C – Stock for Assets • Type D – Spin Off, Split Off, Split Up, and Type D Acquisitive Reorganizations • Type E – Recapitalizations • Type F – Migrations 8
TYPE A REORGANIZATIONS – SECTION 368(a)(1)(A) STATUTORY MERGER Shareholders Target Buyer Requirements: • Statutory Merger – 2 or more • corporations combined and only Necessary Continuity of Interest • Business Purpose one survives (Rev. Rul. 2000-5) • Continuity of Business Enterprise • Requires strict compliance with • Plan of Reorganization statute • Net Value • Target can be foreign; Reg. Tax Effect: 1.368-2(b)(1)(ii) • Shareholders – Gain recognized to the extent of boot • No “substantially all” • Target – No gain recognition • Buyer takes Target’s basis in assets plus gain requirement recognized by Shareholders • No “solely for voting stock” • Busted Merger – taxable asset sale followed by requirement liquidation 9
TYPE A REORGANIZATIONS – SECTION 368(a)(1)(A) STATUTORY CONSOLIDATION Shareholders Shareholders Target Buyer Newco Requirements: • Statutory Consolidations – 2 or • more corporations combined to Necessary Continuity of Interest • Business Purpose form a new corporation • Continuity of Business Enterprise • Requires strict compliance with • Plan of Reorganization statute • Net Value • Target can be foreign; Reg. Tax Effect: 1.368-2(b)(1)(ii) • Shareholders – Gain recognized to the extent of boot • No “substantially all” • Target – No gain recognition • Buyer takes Target’s basis in assets plus gain requirement recognized by Shareholders • No “solely for voting stock” • Busted Merger – taxable asset sale followed by requirement liquidation 10
TRIANGULAR OR SUBSIDIARY MERGERS 1. Forward Subsidiary Merger Buyer Target Merger Sub 2. Reverse Subsidiary Merger Target Buyer Merger Sub 11
TRIANGULAR OR SUBSIDIARY MERGERS Tax Consequences Target • Merger Sub takes Target’s Shareholders basis in assets increased by gain recognized by Target Buyer Target • Buyer takes “drop down” 80% basis in stock of Merger Sub (same as asset basis) Merger Sub Section 368(a)(2)(D) Forward Triangular Merger • A statutory merger of Target into Merger Sub (at least 80% owned by Merger Sub) • Substantially all of Target’s assets acquired by Merger Sub • Would have been a good Type A merger if Target had merged into Merger Sub 12
TRIANGULAR OR SUBSIDIARY MERGERS Tax Consequences • Non-taxable to Target and carryover Target basis Shareholders • No gain to Buyer and Merger Sub under Sections 1032 and 361 • No gain to Target shareholders except Target Buyer to the extent of boot • Buyer’s basis in Target stock generally is the asset basis, but Buyer can choose to 80% take Target shareholders basis in stock (if it is also a B) Merger Sub • If transaction is also a 351, Buyer can use Target shareholders’ basis plus gain Section 368(a)(2)(E) Reverse Triangular Merger • Merger of Merger Sub into Target where – (i) Target shareholders surrender control (80% of voting and nonvoting classes of stock) for Buyer voting stock and – (ii) Target holds substantially all the assets of Target and Merger Sub 13
TYPE B REORGANIZATIONS – SECTION 368(a)(1)(B) STOCK FOR STOCK Shareholders Target Buyer • Buyer’s basis in Target stock is the • Acquisition of stock of Target, by same as the Shareholder’s Solely for Buyer in exchange for Buyer voting voting stock stock • No Boot in a B • Buyer needs control of Target • Reorganization Expenses – distinguish immediately after the acquisition between Target expenses and Target • Control = 80% by vote and 80% of Shareholder expenses (Rev. Rul. 73-54) each class • Creeping B – old and cold stock purchased for cash should not be integrated with stock exchange 14
TYPE C REORGANIZATIONS – SECTION 368(a)(1)(C) STOCK FOR ASSETS Shareholders Buyer Stock Buyer Stock Target Buyer Target Assets • Acquisition of substantially all of the assets • Reorganization Expenses – Buyer may of Target, by Buyer in exchange for Buyer assume expenses (Rev. Rul. 73-54) voting stock • Assumption of stock options not boot • “Substantially All” – at least 90% of FMV of Net Assets and at least 70% of FMV of • Bridge loans by Buyer are boot Gross Assets • Redemptions and Dividends – who pays • Target must liquidate in the reorganization and source of funds • 20% Boot Exception – Buyer can pay boot (non-stock) for Target assets, up to 20% of total consideration; liabilities assumed are not considered boot unless other boot exists 15
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