In these slides, the firm will go over taxes that need to be considered by both buyers and sellers in a merger and acquisition. (06/2016)

1. M&A TAX CONSIDERATIONS FOR
BUYERS AND SELLERS
Royse Law Firm, PC
149 Commonwealth Drive, Suite 1001
Menlo Park, CA 94025
www.rroyselaw.com
IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication,
including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penalties
under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.
Roger Royse
rroyse@rroyselaw.com
www.rogerroyse.com
Skype: roger.royse
Jonathan Golub
jgolub@rroyselaw.com
September 12, 2013

2. OVERVIEW OF TRANSACTIONS
• Tax Free Reorganizations:
– Type A – Merger
– Type B – Stock for Stock
– Type C – Stock for Assets
– Type D – Spin Off, Split Off, Split Up, and Type D Acquisitive Reorganizations
– Type E – Recapitalizations
• Compensation Issues
• Taxable Transactions:
– Stock Sale
– Asset Sale
• S Corporation Strategies
• Foreign Corporations
2

3. TAXABLE VS. TAX FREE
• Type of Acquisition Currency
– Stock
– Securities/Debt
– Deferred payments, earn outs
– Compensatory
• Nature of the Buyers and Seller
– Foreign Parties
– Tax Attributes of Parties
• Shareholder Level Considerations
– Tax Sensitivity of Shareholders
– Appetite for Complexity & Risk
3

4. CONTINUITY OF INTEREST
4
• IRS – 50% Safe Harbor, Rev. Proc. 77-37
• IRS – 40% in Temp. Reg. 1.368-1T(e)(2)(v), example (1)
• John A. Nelson – 38% Stock
• Miller v. CIR – 25% Stock
• Kass v. CIR – 16% Stock is Insufficient
• 2011 Regulations address changes in value between the date of
signing and close;
– if fixed consideration (Consideration is “fixed” if contract states exact number of shares
and other cash or property to be exchanged)
• Consideration is valued as of last business day before the first day the contract is binding and
• If a portion of the fixed consideration is other property identified by value, then the specified
value is used for that portion (see Reg. 1.368-1(e)(2)).
– 2011 Proposed Regulations (Prop. Reg. 1.368-1(e)(2)(vi)) – consideration that varies as
the value of issuing corporation stock changes prior to closing will not fall below (or
above) contractual floor (or ceiling) markers for purposes of continuity of interest. If
binding contract uses average value of issuing corporation stock that average value can
be used for continuity of interest.
• Post transaction sales and redemptions

5. TAX FREE REORGANIZATIONS
• Type A – Merger
• Type B – Stock for Stock
• Type C – Stock for Assets
• Type D – Spin Off, Split Off, Split Up, and Type D
Acquisitive Reorganizations
• Type E - Recapitalizations
• Ruling Guidelines
– Rev. Rul. 77-37
– Rev. Proc. 86-42
– Rev. Rul. 73-54 (terms)
– Rev. Proc. 89-50
– Rev. Proc. 96-30 (Type D Checklist)
5

6. TYPE A REORGANIZATIONS – SECTION 368(a)(1)(A)
STATUTORY MERGER
Requirements:
• Necessary Continuity of Interest
• Business Purpose
• Continuity of Business Enterprise
• Plan of Reorganization
• Net Value
Tax Effect:
• Shareholders – Gain recognized to the extent of boot
• Target – No gain recognition
• Acquiror takes Target’s basis in assets plus gain
recognized by Shareholders
• Busted Merger – taxable asset sale followed by
liquidation
• Statutory Merger – 2 or more
corporations combined and only
one survives (Rev. Rul. 2000-5)
• Requires strict compliance with
statute
• Target can be foreign; Reg.
1.368-2(b)(1)(ii)
• No “substantially all”
requirement
• No “solely for voting stock”
requirement
Target Acquiror
Shareholders
6

7. TYPE B REORGANIZATIONS – SECTION
368(a)(1)(B) STOCK FOR STOCK
7
• Acquisition of stock of Target, by
Acquiror in exchange for Acquiror
voting stock
• Acquiror needs control of Target
immediately after the acquisition
• Control = 80% by vote and 80% of
each class
Target Acquiror
Shareholders
• Acquiror’s basis in Target stock is the
same as the Shareholder’s Solely for
voting stock
• No Boot in a B
• Reorganization Expenses – distinguish
between Target expenses and Target
Shareholder expenses (Rev. Rul. 73-54)
• Creeping B – old and cold stock
purchased for cash should not be
integrated with stock exchange

8. TYPE C REORGANIZATIONS – SECTION
368(a)(1)(C) STOCK FOR ASSETS
8
• Acquisition of substantially all of the assets
of Target, by Acquiror in exchange for
Acquiror voting stock
• “Substantially All” – at least 90% of FMV of
Net Assets and at least 70% of FMV of
Gross Assets
• Target must liquidate in the reorganization
• 20% Boot Exception – Acquiror can pay
boot (non-stock) for Target assets, up to
20% of total consideration; liabilities
assumed are not considered boot unless
other boot exists
Target Acquiror
Shareholders
Target Assets
Acquiror Stock
Acquiror
Stock
• Reorganization Expenses – Aquiror may
assume expenses (Rev. Rul. 73-54)
• Assumption of stock options not boot
• Bridge loans by Acquiror are boot
• Redemptions and Dividends – who pays
and source of funds

9. TYPE D REORGANIZATIONS – SECTION
368(a)(1)(D) DIVISIVE SPIN OFF, SPLIT OFF,
SPLIT UP
9
• Divisive – transfer by a corporation of all or part of its assets
to another corporation if, immediately after the transfer, the
transferor or its shareholders are in control of the transferee
corporation.
• Stock or securities of the transferee must be distributed under the plan in a
transaction that qualifies under Section 354, 355, or 356.
Transferor Transferee
Shareholders
Transferee Stock
Transferee
Stock
Transferor Assets

10. TYPE D REORGANIZATIONS – SECTION
368(a)(1)(D) NON-DIVISIVE
10
• If shareholders of Transferor stock receive
Acquiror stock and own at least 50% of
Acquiror stock, the transaction may be
treated as a non-divisive D REORG even if it
fails as an A REORG for lack of continuity
Transferor Acquiror
Shareholders
with 20%
Acquiror Stock
Acquiror
Stock
Transferor Assets
Merger
Merger Treated as Acquisitive D
Failed Type C Treated as D
Shareholders
Transferor Acquiror
Assets
Cash & Stock
Liquidation / Reincorporation
Shareholders
Transferor Acquiror

11. NET VALUE RULES
11
• 2005 Proposed Regulation 1.368-1(b)(1): Exchange of no net
value (liabilities exceed value) does not qualify as a
reorganization
• Example:
– Acquiror owns all of the stock of both Merger Sub and Target. Target has assets
with FMV of $100 and liabilities of $160, all of which are owed to B. Target
transfers all of its assets to S in exchange for the assumption of Target’s
liabilities, and Target dissolves. The obligation to B is outstanding immediately
after the transfer. Acquiror receives nothing in exchange for its Target stock.
• Explanation:
– Under paragraph (f)(2)(i) of the Reg, Target does not surrender net value
because the FMV of the property transferred by Target ($100) does not exceed
the sum of the amount of liabilities of Target assumed by Merger Sub in
connection with the exchange ($160). Therefore, under paragraph (f) of the
Reg., there is no exchange of net value. See Prop. Reg. 1.368-1(f)(5) Example 3.
• Alabama Asphalt

12. NON-QUALIFIED PREFERRED STOCK
12
• Preferred Stock – limited and preferred as to dividends; and does
not participate in corporate growth if:
– (1) shareholder has right to require issuer to redeem
– (2) issuer is required to redeem
– (3) issuer has right to redeem and is more likely than not to exercise that
right; or
– (4) dividend rate varies based on interest rate, or commodity price or
other index
• Redemption right exercisable within 20 years and not subject to
contingency that renders likelihood remote
• Excludes stock compensation that may be repurchased on
separation from service
• Conversion feature not enough to participate in growth
• Generally treated as boot to shareholders

13. TRIANGULAR OR SUBSIDIARY MERGERS
13
2. Reverse Subsidiary Merger
Target Acquiror
Merger Sub
AcquirorTarget
Merger Sub
1. Forward Subsidiary Merger

14. TRIANGULAR OR SUBSIDIARY MERGERS
14
Section 368(a)(2)(D) Forward Triangular Merger
• A statutory merger of Target into Merger Sub (at least 80% owned by Merger
Sub)
• Substantially all of Target’s assets acquired by Merger Sub
• Would have been a good Type A merger if Target had merged into Merger
Sub
Target Acquiror
Target
Shareholders
80%
Tax Consequences
• Merger Sub takes Target’s
basis in assets increased
by gain recognized by
Target
• Acquiror takes “drop
down” basis in stock of
Merger Sub (same as
asset basis)
Merger Sub

15. TRIANGULAR OR SUBSIDIARY MERGERS
15
Section 368(a)(2)(E) Reverse Triangular Merger
• Merger of Merger Sub into Target where
– (i) Target shareholders surrender control (80% of voting and nonvoting classes of stock) for
Acquiror voting stock and
– (ii) Target holds substantially all the assets of Target and Merger Sub
Target Acquiror
Target
Shareholders
80%
Tax Consequences
• Non-taxable to Target and carryover
basis
• No gain to Acquiror and Merger Sub
under Sections 1032 and 361
• No gain to Target shareholders except
to the extent of boot
• Acquiror’s basis in Target stock
generally is the asset basis, but Acquiror
can choose to take Target shareholders
basis in stock (if it is also a B)
• If transaction is also a 351, Acquiror can
use Target shareholders’ basis plus gain
Merger Sub

16. DOUBLE MERGER
16
Acquiror
Target Shareholders
Step 2: A-type Forward MergerStep 1: Reverse Triangular Merger
Target Acquiror
Merger Sub
Target
Shareholders
80%
Tax Benefit: A taxable reverse merger has just one tax on the shareholders, while a
taxable forward merger has two taxes (one on shareholders and one on corporation).
Intended that entire transaction be a tax-free A-type merger (where 20% boot limitation
does not exist). Pairing the two reduces the risk of incurring the corporate level tax in the
event the entire transaction is not treated as an A-type merger.
REV. RUL. 2001-46
Merger SubTarget+Sub
Merger
Sub Survives

17. DOUBLE MERGER – WHOLLY OWNED LLC
17
Target+Sub
Acquiror
LLC
Merger
LLC Survives
Step 2: A-type Forward MergerStep 1: Reverse Triangular Merger
Target Acquiror
Merger Sub
Target
Shareholders
80%
Tax Benefit: A taxable reverse merger has just one tax on the shareholders, while a
taxable forward merger has two taxes (one on shareholders and one on corporation).
Intended that entire transaction be a tax-free A-type merger (where 20% boot limitation
does not exist). Pairing the two reduces the risk of incurring the corporate level tax in the
event the entire transaction is not treated as an A-type merger.
REV. RUL. 2001-46
Target Shareholders

18. TYPE E REORGANIZATIONS – SECTION 368(a)(1)(E)
RECAPITALIZATIONS
• Useful for single company restructuring
• Often used to transfer control of a company from one generation to the next
• Typical situation = founders of business want to pass on control to children. They
engage in a Type E recapitalization to change their voting common stock to non-
voting common stock or preferred stock, leaving children with voting control of the
company
– There may be estate and/or gift tax consequences to such a transaction
• An important requirement to qualify for tax free treatment under a Type E
recapitalization is that the old stock/securities must have the same value as the new
stock/securities for which they are exchanged
– A recent IRS Memo (Legal Advice Issued by Field Attorneys 20131601F) stated
that where the value of the stock received was in excess of the value of the
stock surrendered, there was no Type E recapitalization and therefore the
excess amount of stock received was taxable
18

19. PROPOSED REGULATIONS ON LOSS IMPORTATION
• General Rule: The acquirer's basis in assets acquired under Section 368 is
usually the transferor’s basis
– Section 362(e)(1) provides an exception for assets with built-in losses
on the date of the transfer
– The IRS has issued Proposed Regulations explaining how these “anti-
loss importation” rules apply (also applies to Section 334(b)
transactions)
• Under the Proposed Regulations, if the aggregate basis of all “Importation
Property” is greater than the aggregate value of such property then the
basis of all the Importation Property is its value on the date of transfer
– Importation Property is property where:
• (1) the gain or loss is not subject to US tax in the hands of the
transferor on a hypothetical sale immediately before the transfer;
and
• (2) the gain or loss is subject to US tax in the hands of the
transferee on a hypothetical sale immediately after the transfer
19

20. PROPOSED REGULATIONS ON LOSS IMPORTATION
Issues to Consider
• Flow-through entities
– For flow-through entities such as a partnerships or S Corps, the
importation property test is made by reference to the partners or
shareholders, not the entity itself
– The hypothetical sale will consider allocations of gains and losses as
per the organizing instrument
– The Proposed Regulations contain an anti-avoidance principal for REITs
and RICs which applies the look-through principal above if the
REIT/RIC acquired the property as part of a plan to avoid the anti-
importation rules
• Controlled Foreign Companies (CFCs) and Passive Foreign Investment
Companies (PFICs)
– Under the Importation Property test, a gain or loss on the sale of an
asset by a PFIC or CFC is not considered subject to US tax even though
it may result in an inclusion under Section 951(a)
– The IRS is aware of the issue and has invited comments
20

21. TARGET DEBT SECURITIES
21
• Exchange of Target securities for Acquiror securities
is tax free under Sections 354 and 356, to the extent
that the principal amount of Acquiror debt is less
than the principal amount of Target debt
• Portion attributable to cash basis accrued interest is
taxable
• Possible COD income
– Example:
• Target bonds with an issue price (stated principal amount) of
$1,000 exchanged for Acquiror stock or debt worth $900; Target
has COD of $100

22. DIVIDEND EQUIVALENCY
22
• Section 356(a)(2) – Boot as dividend or capital gain; post-
reorganization redemption test of Rev. Rul. 93-61
• Clark – hypothetical post-reorganization redemption reduced
shareholder’s interest from 1.32% to .92% - substantially
disproportionate under Section 302(b)(2)
• Section 302(b)(1) – redemption that results in meaningful
reduction in voting power is redemption and not essentially
equivalent to a dividend
• Section 302(b)(2) – greater than 20% reduction is substantially
disproportionate
• E&P Limitation on Dividend – should be Target’s E&P but
unclear if Merger Sub’s E&P counted; PLR 9118025, PLR
9041086, and PLR 9039029

23. CONTINGENT STOCK, ESCROWS, AND
EARN-OUTS
23
• Escrows:
– Target shareholders usually treated as owner of escrowed Acquiror shares unless
otherwise agreed
– Especially true if Target shareholders have right to vote and receive dividends
– Not clear who is owner if Target shareholders do not have right to vote or receive
dividends
• Earn-Out Stock:
– Target shareholders not considered owners until Acquiror shares are issued
– Not treated as boot
– Imputed Interest
• Rev. Proc. 84-42 Ruling Guidelines – use of escrow or contingent stock
– (1) stock must be distributed within 5 years, subject to escrow or contingency
– (2) valid business purpose
– (3) maximum number of shares cannot exceed 50%
– (4) trigger event not controlled by Target shareholders and not based on tax liability
– (5) Formula is objective and readily ascertainable
– (6) Restrictions on assignment and substitution
– (7) In the case of escrows, Acquiror shares shown as issued to Target shareholders,
current voting and dividend rights, and vested

24. UNVESTED STOCK RECEIVED IN A TAXABLE OR
NON-TAXABLE DEAL
24
• Rev. Rul. 2007-49 - The revenue ruling addresses:
– (1) the exchange of fully vested stock for unvested stock of an
acquiring corporation in a tax-free reorganization, and
– (2) the exchange of fully vested stock for unvested stock of an
acquiring corporation in a taxable exchange
• Under either (1) or (2), the Rev. Rul. provides that the
exchange constitutes a transfer of property subject to
Section 83.
– The service provider would need to file an 83(b) election to avoid
the recognition of compensation income in the future as the
shares vest.
– The Rev. Rul. also provides that the spread will be zero, so there is
no downside to the service provider’s 83(b) election.

25. OPTIONS
25
• Assumption or Substitution
– No tax on substitution of NSO
– No tax on substitution of ISO, so long as the substitution is
not a modification. There is no “modification” so long as:
• (1) the aggregate spread in new option does not exceed the
spread in the old; and
• (2) the new option does not have more favorable terms than the
old; see Sections 424(a) and 424(h)(3)

26. OPTIONS – CASH OUT
26
• Cancel options for cash payment
– NSO
• Ordinary income – compensation – withholding or 1099
• Deduction to Target or Acquiror?
– TAM 9024002 – employer deducts based on method of accounting; not clear if cash
out at close is pre-acquisition Target deduction or post-close Acquiror deduction in
absence of scripting the timing
– Under the cash method, the deduction generally arises when the employer has
“paid” the property to the employee. See Regs. §1.461-1(a)(1). Under the accrual
method, the deduction arises when the employer's obligation to make the property
transfer becomes fixed, the property's value is determinable and economic
performance occurs. See Regs. §§1.461-1(a)(2) and -4(d)(2)(iii)(B)
– ISO
• FICA
• Exercise and disqualifying disposition treated differently

27. 409A
27
• Deferred compensation
— A deferral of compensation occurs whenever the service provider (employee) has a
legally binding right during a taxable year to compensation that will be paid to such
person in a later year. Treasury Regulation Section 1.409A-1(b)
• Consequences of violating 409A
— Amounts which were to be deferred are subject to immediate taxation
— Additional 20% penalty on such amounts
— Interest penalty
— CA state tax penalty
• Bonus or Carve Out Plans
• Participation in Earn Outs (Reg. 1.409A-3(i)(5)(iv))
— Payments of compensation in this context may be treated as paid at a designated date
or pursuant to a schedule that complies with 409A if the transaction-based
compensation is paid on the same schedule and under the same terms and conditions
as apply to payments to shareholders generally pursuant to the change in control event

28. 280G GOLDEN PARACHUTE RULES
28
• 20% excise tax and loss of deduction on Excess Parachute Payment
– “Excess Parachute Payment” means the amount by which the Parachute Payment
exceeds the Base Amount
– “Parachute Payment” means a payment, the present value of which, exceeds three
times the Base Amount
– “Base Amount” means the average annual compensation for past 5 years
– Must be paid to a disqualified individual (meaning employee, officer, shareholder,
or highly compensated individual)
– As compensation, AND
– Contingent on a change in control (50% change ownership or effective control, or
ownership change in a substantial portion of the company’s assets)
• Reduce Excess for reasonable compensation
• Exclude reasonable compensation for future services
• Exception for small business corporation and non publicly traded
corporation that has 75% uninterested shareholder approval
• Withholding requirement

29. 280G – OTHER ISSUES
29
• Non-Publicly Traded Stock
– Approval of 75% of shareholders after adequate disclosure
– Vote determines the right of the shareholder to the payment
– Ignore shares held by persons receiving the payment
• Reduction for Excess (299% of payments)
• Reduction for Reasonable Compensation
• Reduction for Future Services

30. TAXABLE STOCK PURCHASES
30
Cash Reverse Triangular Merger
• Treated as Stock Sale
• Shareholders have gain or loss
• Acquiror takes cost basis in Target shares
Merger Sub
Target
Shareholders
Target Acquiror

31. CASH FORWARD MERGER
31
Asset Sale Followed by
Liquidation of Target
• Target has gain on sale
• Target shareholders have
gain on liquidation
(unless 332 applies)
• Acquiror takes cost basis
in Target assets
Target Shareholders
Merger
Acquiror
Survives
Target Shareholders
Variation with Merger Sub:
Target
Target
Acquiror
Acquiror
Merger Sub

32. SECTION 382 – LIMITATION ON LOSSES AFTER
CHANGE IN OWNERSHIP
32
• Section 381 – Survival of Tax Attributes
• Section 382
– When there has been an ownership change of a
corporation with loss carry forwards, use of Net Operating
Losses (NOLs) against future income is limited to the
product of the value of the Target and the long term
interest rate.
– “Ownership Change” occurs if, within a 3 year testing
period, the percentage of stock of Target held by 5 Percent
Shareholders increases by more than 50% over lowest
percentage held by such shareholders during the test
period.

33. BUSTED 351
33
Shareholders Target Shareholder
Business
Acquiror
Target
Stock
Merger
Acquiror
Stock
Rev. Ruling 70-140 Step 1: Incorporate Target
Step 2: Merge Target into Acquiror

34. USE OF WHOLLY OWNED LLC
34
Target Acquiror
LLC
T Shareholders
Merger of Corporation into LLC
• Reg. 1.368-2(b)(1) – by operation of law, all assets and liabilities of
Target become those of LLC, and Target ceases legal existence
• A Type Reorganization

35. SECTION 351 / 721 ROLLOVER
35
Target
Target Shareholders
PEG
• 80% vote & value
• Taxation of boot
• Debt + non-qualified
voting stock
• Assumption of liabilities
Cash out some and rollover
Target
Target
Target
Shareholders PEG
PEG
NewCo
NewCo
Target Shareholders
Target
Shares
Cash
Cash
Cash
Cash
CashAssets
Assets

36. LLC TECHNIQUES
36
Acquiror
Step 1 Step 2
LLC
Former Target
Shareholders
Target
$
Target
Target Corp.
LLC
T Shareholders

37. INSTALLMENT METHOD
37
• Gain on each payment = gross profit ratio times payment
– Gross profit ratio = ratio of total gain to purchase price
– Pre-transaction planning opportunities to utilize basis
• Section 453A – interest charge to the extent taxpayer holds
more than $5 million face amount of Section 453 obligations
• Section 453 Limits
– Not available for publicly held stock or securities, or inventory
– Not available for sales for demand notes or readily tradable notes
– Not available for instruments secured by cash or cash equivalents
– Obligor must be purchaser (cannot use parent debt)
• Section 453 applies unless taxpayer affirmatively elects out
• Section 453(h) – Target shareholders who receive Acquiror debt
in liquidation of Target allowed to use installment reporting

38. CONTINGENT PAYMENTS AND EARN-OUTS
38
• Distinguish Equity vs. Debt
• 3 Issues
– (1) allocation between interest and sales proceeds;
– (2) timing of realization of sales proceeds; and
– (3) timing of basis recovery
• Interest
– 1.1275-4(b)
• Contingent payment debt for cash or publicly traded property – use
non-contingent bond method; projected non-contingent and
contingent payments
– 1.1275-4(c)
• Contingent debt instrument issued for non-publicly traded property –
bifurcate into non-contingent debt instrument and contingent debt
instrument; contingent payment treated as principal based on present
value, excess is interest
• Buyer’s basis is non-contingent portion plus contingent payments
treated as principal

39. CONTINGENT PAYMENTS AND GAIN
RECOGNITION
39
Reg. 15A.453-1(c)
• If capped by maximum amounts, assume maximum for
purposes of gross profit percentage (accelerates gain,
backloads basis)
– If no cap, but term, basis recovered ratably over term
– If neither time nor amount is capped, basis recovered
ratably over 15 years
• Election out of Section 453 – FMV of contingent
obligation is amount realized
• Open transaction treatment – rare and extraordinary
situations only

40. SECTION 338 ELECTION
40
• Section 338(g) – Target in stock sale treated as selling all its
assets followed by liquidation post close (soaks up NOLs)
• Section 338(h)(10) – Sale and liquidation deemed to occur
pre-close; joint election; S corporation or sale out of a
consolidated group
• Adjusted Grossed-Up Basis – New Asset basis is basis in
recently purchased stock (last 12 months) grossed up to
reflect minority shareholder’s basis + liabilities of Target
(including taxes in 338(g))
• Adjusted Deemed Sale Price – grossed up amount realized
of recently purchased stock plus liabilities of old T (on day
after acquisition date)

41. 338(g) ELECTIONS
41
• If there is a US Buyer of a foreign owned foreign
target, then 338(g) election steps up basis and
eliminates E&P and foreign tax credits
• Target may be able to offset 338(g) gains with NOLs

42. PURCHASE PRICE ALLOCATION
42
• Asset Sale or 338 Election
– Sections 1060 and 338 classes based on FMV
– Class I – cash and equivalents
– Class II – actively traded personal property under 1092
– Class III – debt instruments and marked to market
– Class IV – inventory
– Class V – assets other than those in I-IV or VI
– Class VI – goodwill and going concern
• Agreement Allocations – Danielson Rule
– Parties bound by agreement unless IRS determines that the allocation
is NOT appropriate
• SFAS 141R – Purchase Price Allocations
– Assets booked at FMV as of closing date (not signing date)
– Bargain purchase results in accounting gain
– Earn Outs – estimated and recorded
– Deferred tax assets for excess tax deductible goodwill over book value
– Transaction related costs recognized (expensed)

43. S CORPORATIONS AND 338(h)(10)
43
T (S Corp) Acquiror
Merger Sub
Target
Shareholders
• Character difference – ordinary
income assets
• California 1.5% tax on S
corporations
• All Target shareholders must
consent on Form 8023
• Deemed 338 election for
subsidiaries
• 1374 – BIG Tax
• Minority shareholders in rollover
• Hidden tax in liquidation or
deemed liquidation in installment
sale.

44. S CORP 338(h)(10) ELECTION AND
453B(h) BASIS ALLOCATION ISSUE
44
• Gain to Shareholders in year of sale: $1 million x 80% = $800,000; A/B of
Shareholder = $1.8 million
• No 331 liquidation: $1 million cash decreases A/B by $1 million to $800,000;
$800,000 A/B in Note = $3.2 million gain
• 331 liquidation – apportion basis: $1.8 million basis apportioned $360,000 to cash
and $1,440,000 to Note; Gain in cash of $640,000 and gain in note of $2,560,000
for a total of $3.2 million gain (GP % on liquidation is 64%)
• Defer cash portion and include in installment obligation: gain on liquidation equal
to zero; Shareholder A/B in note of $1 million; profit % is 80%
Target Acquiror
Shareholders
$1 million cash
$4 million 453 Note
Stock Sale
$1 million
basis
Cash - $1 million / $1 million A/B
Assets - $4 million / zero A/B
Reg. 1.338(h)(10) – 1(e) Example 10

45. S CORP NO 338(h)(10) ELECTION –
DISAPPEARING BASIS
45
Liquidate Target into
Merger Sub or check the
box Q-Sub
T (S Corp) Acquiror
Merger Sub
T Shareholders
Carryover Basis

46. S CORP INVESTMENT
46
Holdings, Inc.
(S Corp)
Target, Inc.
(QSSS)
T Shareholders
Step One:
Holdings, Inc.
(S Corp)
Target, LLC
(QSSS)
Step Two:
T Shareholders
Holdings, Inc.
(S Corp)
Target, LLC
(QSSS)
T Shareholders
Step Three:
Investor
$$
Membership
interest
Step One: Shareholders of Target, Inc. transfer all Target, Inc. stock to Holdings, Inc. in
exchange for Holdings, Inc. stock. Holdings, Inc. makes an S election and Target, Inc.
elects to be treated as a qualified subchapter S subsidiary (QSSS).
Step Two: Target, Inc. converts to an LLC for state law purposes (Target, LLC).
Step Three: Investor purchases a membership interest in Target, LLC from Holdings,
Inc.

47. Partnership Structure with Profits Interest
47
Target
Acquisition Structure:
Hold Co, LLC
Post Acquisition:
Target converts to wholly-owned LLC which should be
treated as a tax-free liquidation into Hold Co, LLC
Target
Shareholders
100%
100%100%
Merger
$$
Merger Co
Acquiror
Hold Co, LLC
Target
Shareholders 100% less
profits interest
100%
Issuance of
unvested profits
interest
Acquiror
Target, LLC

48. Section 336(e)
48
Acquiror
Shareholder
$
Target Stock
Basic Model (for stock sales): Target is treated as selling all of its assets to an
unrelated person while owned by its former shareholders and then reacquiring
same upon acquisition by Acquiror.
$
$Assets
Assets
= Actual
Component
= Deemed
Component
Acquiror
Shareholder
Target Target3rd Party
Section 336(e) does not apply to sales to a “related person.” The attribution
rules could give rise to an unexpected “related person” situation where the
seller acquires at least 5% of the acquiring partnership as part of the
transaction. For example, where an investment partnership acquires a target
and provides a modest partnership interest to the selling shareholders.

49. FOREIGN CORPORATIONS
49
• Section 367(a) – outbound transactions
– Foreign corporation not treated as a corporation except as provided in
regulations
– Generally, gain recognized unless:
• No more than 50% of stock of foreign Acquiror received by US transferors,
• No more than 50% of stock of foreign Acquiror owned after the transfer by US persons that are
officers or directors or 5% Target shareholders,
• Gain Recognition Agreement ("GRA") is entered into by 5% US transferee shareholders
• 36 month active trade or business test met,
• No intent to substantially dispose of or discontinue such trade or business,
• FMV of the assets of transferee must be at least equal to the FMV of the US target, and
• Tax reporting
• Section 367(b) – inbound and foreign to foreign transfers
– US Acquiror and foreign Target
• Target can be treated as a corporation
• May be income to Target’s US shareholders to extent of Target’s accumulated E&P

50. FOREIGN CORPORATIONS
50
• Anti-Inversion Rules – tax outbound reorganization and/or tax foreign
Acquiror as a U.S. taxpayer; Code Section 7874
– If ownership of former U.S. Target shareholders in foreign Acquiror is 80% or
more; foreign Acquiror is treated as a U.S. company
– If ownership continuity is between 60-80%; foreign Acquiror is NOT treated as a
U.S. company, but U.S. tax attributes cannot be used to offset gains
– 20% excise tax on stock-based compensation upon certain corporate inversion
transactions
– 7874 exception available for companies with “substantial business activities” in
the foreign jurisdiction; facts and circumstances test compares activities of
company in foreign jurisdiction with activities of company globally
• Controlled Foreign Corporations (“CFCs”)
– A foreign entity is classified as a CFC if it has “United States Shareholders” who
collectively own more than 50% of the voting power or value of the company. For
the purposes of the CFC rules, a “United States Shareholder” is defined as US
persons holding at least a 10% interest in the foreign corporation.

51. 1248 AMOUNT ON SALE OF CONTROLLED
FOREIGN CORPORATION
51
Section 1248
• Seller of Controlled Foreign Corporation (CFC) must
treat as dividend gain to extent of E&P
• 1248 inclusion carries foreign tax credits
• 1248 amount determined at year end and pro rated
based on day count, so post closing events can have
an effect on the 1248 amount

52. JOINT VENTURE STRUCTURES
52
• Section 367 Issues
• Disguised Sale
US Company
Foreign
Company
LLC
US & Foreign
Assets

53. TRANSACTION COSTS
53
• Must capitalize “Facilitative Costs” that relate to a “Categorized Transaction”
unless an exception applies
• Categorized Transactions
– (1) Acquisition of assets constituting a trade or business
– (2) Acquisition of an ownership interest in an entity if the acquirer and target are
related after the transaction
– (3) Acquisition of an ownership interest in the taxpayer
– (4) Restructuring, recapitalization, or reorganization of the capital structure of the
entity
– (5) A Section 351 transfer
– (6) Formation of a disregarded entity
– (7) Acquisition of capital
– (8) Stock issuance
– (9) A burrowing; and
– (10) Writing an option

54. TRANSACTION COSTS
54
• “Facilitative Costs”
– Costs incurred in the process of investigating or pursuing a Categorized
Transaction
• Includes valuation costs and registrar and transfer agent fees
• Excludes consideration for the transaction (not a Facilitative Cost, but may be
capitalized under other principles) and business integration costs
– Exceptions
• Does not include costs relating to a “Covered Transaction”
– Covered Transaction
» Taxable acquisition by the taxpayer of assets constituting a trade or
business
» Taxable acquisition of ownership interest, regardless of whether
taxpayer is the target or acquirer, if the two parties are related after
the transaction
» Type A, B, C, or Acquisitive D reorganizations

55. TRANSACTION COSTS
55
• “Facilitative Costs” cont.
– Exceptions cont.
• Bright Line Date
– Unless the cost is an “Inherently Facilitative Cost” then costs incurred before
the “Bright Line Date” are not Facilitative Costs
– The Bright Line Date is the earlier of: (a) the execution of the letter of intent
(or similar document); or (b) the authorization of the company’s board of
directors
– Inherently Facilitative Costs are: (1) valuation; (2) costs to structure the
transaction; (3) draft and review of documents; (4) regulatory approval; (5)
shareholder approval; and (6) conveyance of property
– Success-Based Fees
• Costs for which the obligation to pay is contingent upon a successful closing are
presumed to be Facilitative Costs, however the taxpayer may overcome this
presumption by maintaining sufficient documentation
• Rev. Proc. 2011-29 provides a safe harbor permitting taxpayers to treat 70% of the
success-based fees as being non-Facilitative Costs and treating the remaining 30%
as Facilitative Costs.

56. 56
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