Before entering into a business transaction, the tax implications must be fully understood. Reorganizations may have tax implications for seller shareholders if those shareholders receive consideration from an acquirer that does not qualify as exempt.
Scottsdale Arizona business law attorneys at Lotzar Law Firm, P.C. represent clients in all types of business transactions including Tax- Exempt Reorganization. Tax-Exempt Reorganization refers to Mergers & Acquisitions (M&As) transactions that do not generate tax obligations. Lotzar Law Firm, P.C. provides qualified legal representation for investors and business owners to protect your legal and financial interests. Call today to schedule a consultation and learn how we can help with Tax-Exempt Reorganization.
Tax-Exempt Reorganization is similar in most ways to a typical M&A deal except the acquirer uses stock instead of debt or cash for a substantial part of the consideration that is provided to sellers.
Tax-Exempt Reorganization is similar in most ways to a typical M&A deal except the acquirer uses stock instead of debt or cash for a substantial part of the consideration that is provided to sellers.
Understanding Tax-Exempt Reorganization
The Internal Revenue Code section 368 sets forth several conditions that must be fulfilled in order for a Merger & Acquisition transaction to be considered a Tax-Exempt Reorganization. The IRC requires:
- Continuity of the ownership interest. Generally, 50 percent or more of consideration provided to sellers must be stock owned by the acquirer.
- Continuity of the business operations. The acquirer of the business must maintain ongoing business operations for a period of at least two years after the completion of the Tax-Exempt M&A transaction. This means the acquirer must either use a substantial part of the assets of the target in an existing business or must continue to conduct the business that the acquired organization was historically involved in.
- Legitimate business purpose. The Tax-Exempt Reorganization must have some legitimate or valid purpose. The reorganization may not be undertaken solely for the purposes of avoiding or reducing income tax obligations.
The Tax-Exempt Reorganization may also not be a part of a broader plan to complete a taxable acquisition. The Step Transaction Doctrine applies to combine a series of multiple transactions that are formally kept separate but that are part of a larger whole. If the Tax-Exempt Reorganization combines with other steps taken to constitute a taxable acquisition, then the reorganization will not be treated as exempt.
IRC section 368 lists several types of corporate acquisition structures that can qualify as a Tax-Exempt Reorganization or as a Tax-Deferred Reorganization. These include a Type A; Type B and Type C stock-for-assets acquisition. Statutory Mergers; Statutory Consolidations; and Forward and Reverse Triangular Mergers are among the different types of transactions that can be considered a Tax-Exempt Reorganization.
Lotzar Law Firm, P.C. has represented many clients at all phases of a Tax-Exempt Reorganization. It is important to be represented by a qualified Scottsdale Arizona lawyer familiar with the relevant sections of the Internal Revenue Service code when entering into these complex transactions. Call today to schedule a consultation and learn more about how we can help you with all of your Mergers & Acquisitions transactions.
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