BB&K In The News

BB&K Attorney Kyle Phillips writes about tax liabilities in business transaction for the Press-Enterprise Best in Law column.

BY KYLE PHILLIPS

The structure of a business combination, acquisition or disposition can have significant tax consequences to all parties in the transaction. With different structures yielding different tax consequences, it is important to plan accordingly to mitigate the tax impacts of the transaction.

A simple and straightforward structure is a stock purchase transaction, where the shareholder of a corporation sells stock in the corporation to a prospective purchaser. The seller recognizes capital gain or loss on the sale of the shares, and the purchaser takes a tax basis (i.e., the reference point by which future gain or loss is recognized with respect to a sale) in the acquired shares equal to the purchase price. Further, the corporation remains the owner of its assets, and continues to be on the hook for all of its liabilities and obligations.

The legal and administrative simplicity of this structure, combined with the favorable tax treatment to the seller, makes a stock purchase very appealing to parties negotiating the deal.

On the other hand, in an asset acquisition, the purchaser acquires assets, and if applicable, assumes liabilities of the corporation. While the corporation generally recognizes capital gain or loss on the sale of assets, depending on the assets sold, a portion of that gain may be re-characterized as ordinary income subject to higher tax rates than capital gains. Further, the purchaser of the assets will allocate the purchase price among the assets acquired, which could result in beneficial tax treatment for the purchaser.

An asset acquisition requires an additional step of transferring ownership of the acquired assets to the purchaser that is not required in a stock purchase transaction. As a result, the administrative burden and potential ordinary income treatment of the gain in an asset purchase transaction should be balanced against the tax benefits that inure to the purchaser in the transaction.

Each transaction is unique and involves different variables and concerns. Because an increased tax liability can reduce a party’s return on the transaction, care should be exercised at the outset of negotiations to ensure that a tax-efficient structure is implemented that will benefit all parties in the transaction.

*This article first appeared in The Press-Enterprise on April 19, 2015. Republished with permission.