May 01, 2014
Article by Ilan Hirschfeld, Partner-in-Charge of the New Jersey Offices, and Lawrence Litt, Tax and Business Services Partner, "M&A Tax Considerations for Small- and Middle-Market Purchasers," Featured in New Jersey Business
What is going through the mind of a small- or middle-market company’s C-level executive exploring how to grow his or her company through an acquisition? The answer is typically centered around how best to achieve the greatest return to the shareholders on the company’s investment in the enterprise being acquired. The acquiring company’s management will need to fully appreciate the series of tax complexities to be considered, or else it runs the risk of the anticipated return on investment being adversely impacted by certain tax exposures of the acquired enterprise that may unwittingly be assumed by the acquiring company. How does an acquiring company avoid – or at least mitigate – such a dilemma? The answer begins with careful planning around properly structuring a transaction, as well as conducting an appropriate level of tax due diligence.
A purchaser aims to structure an M&A transaction in as tax efficient a manner as possible while preserving any available tax attributes (e.g., net operating losses, tax credits) and minimizing the amount of potential tax exposures assumed. A purchaser first needs to carefully consider how to optimally structure an M&A transaction from a tax perspective. When company stock is acquired, the purchaser receives carryover tax basis in the underlying assets of the company. Therefore, a purchaser may be seeking to structure the transaction to achieve a “step-up” in the tax basis of the underlying assets to the fair market value paid for the company. This step-up would generate future tax deductions for the company, including a tax deduction for the amortization of goodwill not otherwise available in an ordinary stock acquisition. How is this step-up achieved? The options available to the purchaser include, for example, acquiring assets in lieu of stock, jointly making a Section 338(h)(10) election, if applicable, with the seller or acquiring 100 percent of the partnership interests in an LLC under Revenue Ruling 99-6. In any one of these transaction structures, the price paid by the purchaser (including certain liabilities assumed) will be allocated to the underlying assets of the company utilizing the respective fair market values of such assets with the residual generating tax basis in goodwill. In addition, a purchaser will have to consider whether the company being acquired has any tax attributes and the potential limitation under Section 382 upon the future utilization of such attributes.