Tax Issues: Mergers & Acquisitions

In a previous article (Corporate Mergers and Acquisitions), motivating factors of both buyers and sellers were mentioned. For the Seller, and regardless of the Buyer classification, the primordial concern & motivation generally revolves around the tax issues and implications.

Tax Issues in mergers and acquisitions encompass all under-scored factors associated with any transaction, and therefore should serve as the foundation for negotiations. For additional assistance please contact a specialist through Capital Investment Advisor.

What are the principal goals of tax planning & tax issues for a merger, acquisition or divestiture?

From the Buyer’s standpoint, the primary goal would be to minimize, on a present value basis, the total cost of not only acquiring but also operating, and ultimately selling the acquired company or the assets of the company. 

On behalf of the Seller, of foremost concern would be to maximize, on a present value basis, the after-tax proceeds from the sale of the company or the assets thereof.  Prudent tax issues planning could include among other things, changing the company’s structure prior to the acquisition, or developing techniques to provide tax benefits to a potential buyer at little or no tax cost incurred by the Seller.

There is no absolute checklist of tax issues that could arise in every type of transaction.  The specific tax issues depend upon the facts and circumstances of that particular deal.

Tax Issues to consider:

1. Earnings and profits or distribution.
2. Structure of transaction: Would this be a Stock Acquisition” or an “Asset Acquisition”?
3. Type of entity: “C Corporation”, “S Corporation”, “General or Limited Partnership”.
4. Financing arrangement: Debt-Equity and the effect of the original issue discount rules.
5. Management participation and compensation:  Different structures of management participation and compensation may create vastly different tax results.
6. Post-acquisition operations: Net operating loss, credit carry backs and carry-forwards, amortization of goodwill, planned asset dispositions and accounting methods, foreign tax credits and the interrelationships among the differing tax systems of the countries in which the combining companies do business.
7. State tax laws.