TAX ISSUES in Selecting Optimal Deal Structure

Report
Buying, Selling and Transitioning a Business:
Increase your ROI with Thoughtful Tax Planning
September 18, 2012
Kevin Kaiser, Lindquist & Vennum
Mark Salsbury, Lindquist & Vennum
Today's Presenters
Kevin Kaiser
Tax Partner
[email protected]
Mark Salsbury
Tax Partner
[email protected]
Agenda
• M&A Tax Considerations Overview
• Corporate Structuring Alternatives and
Considerations
• Partnership (LLC) Structuring Alternatives and
Considerations
• Deal Elements and Reporting
• Q&A
M&A Tax Considerations Overview
M&A Tax Considerations Overview
• Tax Due Diligence Process
• Tax Structuring Considerations and Deal Elements
• Drafting/Implementation
• Tax Reporting
M&A Tax Considerations Overview
Tax Due Diligence Process
• Investigation and analysis
– Buy Side
– Sell Side
• Pre-Transaction Tailoring
– Intercompany accounts
M&A Tax Considerations Overview
Tax Structuring Consideration and Deal Elements
• Non-tax considerations
– Asset or equity
• Taxable or tax deferred
• Buy Side
– Maximize tax benefit from purchase price
– Preservation of tax benefits (e.g. NOLs)
– Minimize tax on income from operations
– Minimize tax on exit
M&A Tax Considerations Overview
Tax Structuring Consideration and Deal Elements
(Con't)
• Sell Side
– Minimize or defer tax on sale
– Utilize tax benefits
– If target is a corporation (S or C corp), Sellers typically
want to sell stock
• One level of tax on sale of shares
• Gain generally eligible to be taxed at long-term
capital gains rates (top rate currently 15%)
M&A Tax Considerations Overview
Tax Structuring Consideration and Deal Elements
(Con't)
– If target is an LLC, Sellers are generally more
concerned with minimizing ordinary income (taxed
at 35%) , i.e., less concerned about selling equity
vs. selling assets from a tax perspective
• Seek to benefit from "win-win" solutions
M&A Tax Considerations Overview
Drafting/Implementation
• Proper documentation is critical
• Purchase agreement
– Description of transaction
– Purchase price adjustments (e.g., working capital)
– Tax and employee benefit representations and
warranties
– Pre-closing covenants
– Post-closing covenants
M&A Tax Considerations Overview
Drafting/Implementation (cont')
– Post-closing covenants
• Tax return preparation
• Amendments to tax returns
• Allocation of taxes between pre- and post-closing
periods
• Tax audit responsibility
– Indemnification (indemnity for taxes, treatment of
indemnity payouts, etc.)
– Purchase price allocation
CPE Polling Code #1
11
Corporate Structuring and
Considerations
Corporate Structuring and
Considerations
Basic Overview
• Tax treatment of transaction depends on whether
Buyer uses cash or stock
• Mostly cash = Taxable
• Mostly Stock = Potentially Tax-Deferred
Corporate Structuring and
Considerations
Regular Stock Purchase
Reverse Triangular Merger
Merger
Consideration
Purchase Price
Shareholders
Shareholders
Buyer
Buyer
Target
Target
Merger
Sub
Merger Sub merges
into Target;
Target survives
Both transactions result in Buyer owning the equity
interests of Target.
Corporate Structuring and
Considerations
Taxable Stock Sale
• Seller consequences
• Buyer consequences
• Entity consequences
Corporate Structuring and
Considerations
Regular Asset Purchase
Forward Triangular Merger
Shareholders
Purchase
Price
Purchase Price
P
T
Purchase Price
Shareholders
P
T
S
T Assets
Assets
S
T merges into S;
S survives
Newco
Caution: S will succeed to T’s corporate-level tax liability
from the deemed sale of assets. Must address contractually. Not a
common structure for a taxable transaction.
Both transactions result in Buyer’s subsidiary owning the
assets of Target.
Corporate Structuring and
Considerations
Taxable Asset Sale
• Seller consequences
• Buyer consequences
• Entity consequences
CPE Polling Code #2
20
Corporate Structuring and
Considerations
Deemed Asset Sale (§338(h)(10) Election)
• Basic requirements:
– Buyer must be a corporation
– Buyer must acquire 80% or more of stock "by
purchase"
– Target must be an S corp or subsidiary member of
a group filing consolidated returns
Corporate Structuring and
Considerations
Deemed Asset Sale (§338(h)(10) Election)
• Seller consequences
• Buyer consequences
• Entity consequences
Corporate Structuring and
Considerations
Drop Down to LLC
S Corp
1.
S corp contributes
assets and liabilities
to Newco LLC
2.
Purchase and sale of membership interests
in Newco LLC (often less than 100%)
Buyer
Newco LLC
Corporate Structuring and
Considerations
Drop Down to LLC
• Facilitates inside basis step where owners also
desire tax-deferred rollover treatment
• Allows a buyer that is an LLC or partnership to
maintain flow through tax treatment for target
• Must consider anti-churning issues
Corporate Structuring and
Considerations
Corporate Reorganizations
• Basic principles
• Statutory requirements
• Non-Statutory requirements
– Continuity of shareholder interest
– Continuity of business enterprise
– Business purpose
– Exchange of "net value"
Corporate Structuring and
Considerations
Corporate Reorganizations
"A" Reorganization
Shareholders
Target
Buyer stock/other consideration
(other consideration not to exceed 60%)
Buyer
Target merges with and into Buyer with Buyer surviving
Note: For liability protection, consider merging Target with an into Buyer's wholly owned LLC subsidiary
Corporate Structuring and
Considerations
Corporate Reorganizations
"B" Reorganization
Buyer voting stock (and
no other consideration)
Shareholders
Buyer
Target
Target stock which
constitutes "control"
for purposes of
Section 386(c)
Note: A "B" reorganization can also be effected by merger
CPE Polling Code #3
09
Partnership (LLC) Structuring and
Considerations
Partnership (LLC) Structuring and
Considerations
Purchase of Partnership or Membership Interests
• Purchase of <100% of equity interests
• Sellers
– Gain generally eligible for LTCG treatment
– Exception – "hot asset" rules
• Unrealized receivables
• Inventory
• Depreciation recapture
Partnership (LLC) Structuring and
Considerations
Purchase of Partnership or Membership Interests
• Buyer
– Basis in membership interest = amount paid for
membership interest plus share of partnership
liabilities
– §754 election to obtain basis step up in Buyer's share
of assets
• LLC
– Technical termination under §708 if 50% or more of
capital or profits are sold within 12 month period
Partnership (LLC) Structuring and
Considerations
§754 Election
• A §754 election is made when Buyer acquires less
than 100% of the equity in an LLC to obtain Asset
SUB
• Election impacts only Buyer’s share of inside basis
• Nonselling members’ share of inside basis is
unchanged (i.e., they are not affected by the
election)
Partnership (LLC) Structuring and
Considerations
Purchase of Partnership or Membership Interests
• Purchase of 100% of equity interests by single buyer
• Rev. Rul. 99-6
– Sellers – Sale of partnership interests
– Buyer – Purchase of assets
Partnership (LLC) Structuring and
Considerations
Partnership Asset Sale
• Cash purchase
• Cash and equity consideration
Partnership (LLC) Structuring and
Considerations
Partnership Division or Merger Rules
• Two partnerships merge into one partnership,
resulting partnership treated as continuation
of the partnership the members of which own
50% or more of the resulting partnership
• Default rule – Assets over merger
– Terminated partnership deemed to transfer assets
to resulting partnership in exchange for equity
interests, and then liquidate
Deal Elements and Reporting
Deal Elements and Reporting
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Escrows
Earn-outs and contingent consideration
Transaction costs
Noncompete agreements
Personal goodwill
Contingent liabilities
Purchase price allocations
Tax Documentation
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