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TAX ASPECTS OF BUYING OR SELLING A BUSINESS

TAX ASPECTS OF BUYING OR SELLING A BUSINESS. San Antonio/Houston Presentation: Crawford Moorefield Strasburger & Price, LLP Houston Office 713.951.5629 crawford.moorefield@strasburger.com. Dallas Presentation: Jim Browne Strasburger & Price, LLP Dallas Office 214.651.4420

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TAX ASPECTS OF BUYING OR SELLING A BUSINESS

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  1. TAX ASPECTS OF BUYING OR SELLING A BUSINESS San Antonio/Houston Presentation: Crawford MoorefieldStrasburger & Price, LLPHouston Office 713.951.5629crawford.moorefield@strasburger.com Dallas Presentation: Jim Browne Strasburger & Price, LLP Dallas Office 214.651.4420 jim.browne@strasburger.com

  2. Topics • Transaction considerations • Taxable asset acquisition • Taxable stock acquisition • Tax-free reorganizations • Acquisitions using disregarded entities

  3. Topics • Transaction considerations • Taxable asset acquisition • Taxable stock acquisition • Tax-free reorganizations • Acquisitions using disregarded entities

  4. Transaction Considerations • Form of transaction • Asset purchase • Stock purchase • Merger • Hybrid – merger by division (TBOC §10.003)

  5. Transaction Considerations • Form and timing of consideration • Buyer equity versus cash or other property • Like-kind exchange • Deferred, contingent, or escrowed payments • Employment/consulting agreements and covenants not to compete • Shareholder assets, including goodwill • Purchase price allocation • Etc.

  6. Topics • Transaction considerations • Taxable asset acquisition • Taxable stock acquisition • Tax-free reorganizations • Acquisitions using disregarded entities

  7. Taxable Asset Acquisition • Purchase of assets Result Transaction Buyer Shareholders Buyer Shareholders Target Shareholders Target Shareholders Cash Target Buyer Target Buyer Assets AcquiredTarget assetsand liabilities Cash;Retained assetsand liabilities

  8. Taxable Asset Acquisition • Merger by division Result Transaction Buyer Shareholders Buyer Shareholders Target Shareholders Target Shareholders Cash Target Buyer Target Buyer Merger AcquiredTarget assetsand liabilities Cash;Retained assetsand liabilities

  9. Taxable Asset Acquisition • Forward merger Result Transaction Buyer Shareholders Buyer Shareholders Target Shareholders Target Shareholders Cash Target Buyer Cash Buyer Merger Target assetsand liabilities

  10. Taxable Asset Acquisition • Forward subsidiary merger Result Transaction Buyer Shareholders Buyer Shareholders Target Shareholders Target Shareholders Cash Target Buyer Cash Buyer Merger Buyer Sub Buyer Sub Target assetsand liabilities

  11. Topics • Transaction considerations • Taxable asset acquisition • Taxable stock acquisition • Tax-free reorganizations • Acquisitions using disregarded entities

  12. Taxable Stock Acquisition • Purchase of stock Result Transaction Buyer Shareholders Buyer Shareholders Target Shareholders Target Shareholders Cash Target Buyer Cash Buyer Stock Target

  13. Taxable Stock Acquisition • Reverse subsidiary merger Result Transaction Buyer Shareholders Buyer Shareholders Target Shareholders Target Shareholders Cash Target Buyer Cash Buyer Merger Buyer Sub Target

  14. Taxable Stock Acquisition • Section 338 election Result Deemed Transaction* Target Shareholders Target Shareholders Buyer Shareholders Buyer Shareholders Cash Target Buyer Cash Buyer Cash Assets New Target New Target *Actual transaction is a sale of stock to Buyer, or a reverse subsidiary merger.

  15. Topics • Transaction considerations • Taxable asset acquisition • Taxable stock acquisition • Tax-free reorganizations • Acquisitions using disregarded entities

  16. Tax-Free Reorganizations • General considerations • Involves only corporations and requires issuance of qualifying consideration (stock) • Tax effects • Generally no entity level taxes • Target Shareholders recognize gain only to extent of non-qualifying consideration (a/k/a “boot”) • Acquiror forgoes FMV tax basis for Target assets

  17. Tax-Free Reorganizations • Application • Acquisition of a public company • Public company spin-off • Target shareholders have low stock basis, and Target has high asset basis • Shareholders can limit investment risk with respect to Acquiror stock, or monetize Acquiror stock, using option “collars,” margin loans, and/or other derivatives • Reorganization of consolidated subsidiaries

  18. Topics • Transaction considerations • Taxable asset acquisition • Taxable stock acquisition • Tax-free reorganizations • Acquisitions using disregarded entities

  19. Summary • Taxable asset acquisition • Preferred form for Buyer (selectivity) • Consider merger by division • Double taxation if C Corporation • Taxable stock acquisition • No buyer step up if C Corporation • Potential deemed asset sale election • Use reverse subsidiary merger

  20. Summary • Tax-free reorganizations • Target Shareholders recognize gain only to the extent of boot received • Acquiror foregoes step-up • Consider alternative transactions, including • Horizontal double dummy (allows excess boot) • LLC/partnership Acquiror (no boot limit and buyer gets step-up as and when Seller recognizes gain)

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