stewart cloer

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Published on August 20, 2007

Author: Sharck


IPA Advisory & Intermediary Services, LLC:  IPA Advisory andamp; Intermediary Services, LLC Welcome to 'A Horse of a Different Color' a look at taxable transactions under §338. Do I look at a stock sale or do I look at an asset sale?:  Do I look at a stock sale or do I look at an asset sale? First decision to be made is whether sale is to be a taxable sale or a non-taxable event. If taxable – will we sell assets or will we sell stock? What are the advantages and disadvantages to each? Four General Methods to Sell a Business: Taxable Asset Sale Taxable Stock Sale Non-Taxable Asset Sale Non-Taxable Stock Sale Consideration determines Buyer Advantages – Taxable Asset Sale:  Buyer Advantages – Taxable Asset Sale Ability to choose which assets to purchase. 'Step-up' in the tax basis of the assets. Buyer does not inherit problems such as union contracts and state of incorporation. Except in limited circumstances – free of contingent liabilities Buyer Disadvantage – Taxable Asset Sale:  Buyer Disadvantage – Taxable Asset Sale Non-transferable rights are lost. Transferring title to assets more difficult. Additional governmental fees (e.g., sales tax, recording fees) Unable to carryover seller’s tax attributes (e.g. NOL andamp; capital loss) Seller Advantages – Taxable Asset Sale:  Seller Advantages – Taxable Asset Sale Can maintain the existence of the current corporate form. Seller still owns any rights and assets which were not part of the sale. (e.g. patents, franchises) Seller Disadvantages – Taxable Asset Sale:  Seller Disadvantages – Taxable Asset Sale If a 'C' corporation, Seller will have double tax. If a 'C' corporation which has converted to an 'S' corporation will be subject to BIG tax. Depreciation recapture problems. Selling assets is more complex. Buyer Advantages – Taxable Stock Sale:  Buyer Advantages – Taxable Stock Sale Obtain rights which are non-transferable Retain favorable debt structure Seller’s tax attributes survive, subject to some limitations Less complex than an asset sale Buyer Disadvantage – Taxable Stock Sale:  Buyer Disadvantage – Taxable Stock Sale Minority shareholder rights Receive all liabilities known and unknown State of incorporation remains the same No step up in tax basis Seller Advantage – Taxable Stock Sale:  Seller Advantage – Taxable Stock Sale Less complex transaction Avoids double tax in the C corporation Capital gain at individual capital gain rate Liabilities transferred to Buyer Seller Disadvantages – Taxable Stock Sale:  Seller Disadvantages – Taxable Stock Sale Reduced price because of no basis step up Can not pick which assets to retain This creates a dichotomy of someone has to win and someone has to loose!:  This creates a dichotomy of someone has to win and someone has to loose! Perhaps §338 is an alternative.:  Perhaps §338 is an alternative. A number of disadvantages will not be present Transaction will be easier to accomplish Instead of tax controlling the transaction, the transaction can control the tax. What is §338?:  What is §338? An election which can be made by a purchasing corporation to treat an asset purchase as a stock purchase. §338(g) – unilateral §338(h)(10) - joint Slide14:  To make a §338 election, the purchasing corporation must make a 'qualified stock purchase' of the target stock. To make a qualified stock purchase, the purchasing corporation must purchase at least 80% of the total voting and at least 80% of all other classes of stock during a 12 month period which begins on the date of the first acquisition. So what really happens under §338?:  So what really happens under §338? If the purchasing corporation makes a §338 election, the original target corporation is deemed to sell its assets to a new corporation. This results in double tax! Here is why there is a double tax::  Here is why there is a double tax: The target company will recognize gain or loss as if it had sold assets to the new company. The shareholders of the target company will then pay tax on gain from the sale of stock to the purchasing company. Same money just two tax bites. Is there an alternative?:  Is there an alternative? §338(h)(10) This is a joint election between the purchaser and seller If a §338(h)(10) election is made, the stock purchase is recharacterized as an asset sale followed by a liquidation. (§332) Single tax! From a Buyers standpoint this is a good solution!:  From a Buyers standpoint this is a good solution! Buyer has the ease of a stock purchase combined with the tax benefits of an asset purchase. Advantages for Sellers:  Advantages for Sellers One single layer of tax, ease of transaction When should you consider making a §338(g) election?:  When should you consider making a §338(g) election? If the target is a foreign corporation not subject to U.S. taxation. U.S. corporation can use §338(g) to gain a basis step-up without exposing the foreign target to U.S. tax due to gain recognition. If the domestic has sufficient NOLs or other tax attributes to offset gain. If target has self-created intangibles which can be converted into §197 intangibles. When should you choose to use §338(h)(10):  When should you choose to use §338(h)(10) Where the sellers would recognize more gain through a stock sale than an asset sale. If the §338(h)(10) election is made, the sale of the stock is ignored for tax purposes. Transaction simplification Questions?:  Questions?

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