Reorg and Tax Returns
There are a seven types of reorganizations, and each type has different consequences. The client is considering a Type B reorganization, which is an acquisition. Two of its subsidiaries have been acquired this way. The client is considering type A, which is a merger or consolidation; Type C, which is an acquisition, with liquidation, and Type D, which is a transfer. This paper will outline the differences between these in terms of structure, and in terms of their tax consequences. Now, the client should be aware that tax reasons are a terrible reason to do things like mergers and acquisitions because of the profound impact those activities can have on corporate strategy, but it is always good to know the tax consequences of the different types of corporate reorganization before engaging in them.
Type A The Type A reorg is merger and consolidation. In this, the acquiring company (the client) would acquire another company. As part of the acquisition it would acquire the assets of the target company and assume ownership over the target and all of its assets (Kibilko, 2016). For an acquisition to be considered Type A, it needs to meet the following requirements:
50% of the payment must be in the stock of the acquirer
The selling entity is liquidated
Acquirer acquires all assets and liabilities of the seller
The main benefits of Type A are that it can have multiple payment types. Some cash can be used, as long as 50% of the payment is in stock. The sellers acquire stock in the acquiring company, which means that they can defer realizing the gain or loss on the sale until such time as they sell the share of the acquiring company. They would only pay on whatever cash was paid. The acquirer takes on the assets and liabilities of the acquired firm. The acquired firm is liquidated, however, which means that the acquirer only takes on the revenues and losses of the target firm from the data of acquisition (Accounting Tools, 2016). The tax burden therefore is mainly in the cash that was paid to the shareholders of the target firm.
To the extent that the acquirer has paid above market value for the acquired firm -- which is normal, in order to entice the shareholders to sell -- the amount paid that goes above the market value is recorded on the balance sheet as goodwill. If the company does not realize gains in the amount of the goodwill, it may be required to write that down at a later date, though it is likely to choose a year in which to do so that would deliver the best tax consequences for shareholders, within the limits of the rules regarding writing down impaired assets.
Type B
A Type B reorganization is similar to a Type A, but in the Type B, the target organization becomes a subsidiary of the acquiring company, rather than being absorbed into the acquiring company (Kibilko, 2016). In this situation, the acquiring company need not buy all the stock, but merely controlling interest. It can buy the remaining stock at a later date, again as part of a Type B reorg. Three are certain constraints for a reorg to meet the criteria of a Type B reorg:
No more than 20% of the value in cash
At least 80% of voting stock acquired with voting stock
At least 80% of acquiree's outstanding stock acquired
Selling entity becomes a subsidiary of the acquirer
One of the main advantages of this type of acquisition is strategic, in that the acquiree is still an ongoing business, versus in Type A where it is liquidated. The liquidation under Type A results in the termination of all contracts that the acquired firm held, which could be detrimental to the business of the acquiring company. Type B resolves that -- because the acquired business is not dissolved, all of the contracts that it had remain intact. For taxation, the acquired firm's taxation flows through to the corporate owner from the data of acquisition, same as in Type A. For the sellers, they again pay tax on the cash they receive in the transaction, but do not realize a gain or less until they sell their shares of the acquiring firm.
Type C
A Type C reorg is similar to a Type A. In the Type C, the threshold for the use of stock in the purchase is 80%, same as in Type B, and higher than the 50% in Type A. The seller will be liquidated, same as in Type A. This type is more commonly associated with...
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