Your SlideShare is downloading. ×
0

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

Sccba buying and selling a business practical tax consequences 110125

1,163

Published on

Published in: Business, Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
1,163
On Slideshare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
8
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. BUYING AND SELLING A BUSINESS
    Practical Tax Consequences
    Roger Royse
    Royse Law Firm, PC
    2600 El Camino Real, Suite 110
    Palo Alto, CA 94306
    rroyse@rroyselaw.com
    www.rroyselaw.com
    www.rogerroyse.com
    Skype: roger.royse
    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.
  • 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
    Taxable Transactions:
    Stock Sale
    Asset Sale
    Foreign Corporations
    S Corporation Strategies
    Partnership Techniques
    2
  • 3. TAXABLE VS. TAX FREE
    Type of Acquisition Currency
    Stock
    Securities/Debt
    Deferred payments, earnouts
    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
    John A. Nelson – 38% Stock
    Miller v. CIR – 25% Stock
    Kass v. CIR – 16% Stock is Insufficient
    Value – 2007 Regulations address changes in value between the date of signing and close; if fixed consideration, (1) stock consideration is valued as of last business day before the first day the contract is binding and (2) if a portion of the fixed consideration is other property identified by value, then the specified value is used for that portion (see Reg. 1.368-1T(e)(2)). Consideration is “fixed” if contract states exact number of shares and other cash or property to be exchanged
    Post transaction sales and redemptions
  • 5. TAX FREE REORGANIZATIONS
    • Type A – Merger
    • 6. Type B – Stock for Stock
    • 7. Type C – Stock for Assets
    • 8. Type D – Spin Off, Split Off, Split Up, and Type D Acquisitive Reorganizations
    • 9. Ruling Guidelines
    • 10. Rev. Rul. 77-37
    • 11. Rev. Proc. 86-42
    • 12. Rev. Rul. 73-54 (terms)
    • 13. Rev. Proc. 89-50
    • 14. Rev. Proc. 96-30 (Type D Checklist)
    5
  • 15. TYPE A REORGANIZATIONS – SECTION 368(a)(1)(A) STATUTORY MERGER
    Shareholders
    Target
    Acquiror
    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)
    • 16. Requires strict compliance with statute
    • 17. Target can be foreign; Reg. 1.368-2(b)(1)(ii)
    • 18. No “substantially all” requirement
    • 19. No “solely for voting stock” requirement
    6
  • 20. TYPE B REORGANIZATIONS – SECTION 368(a)(1)(B) STOCK FOR STOCK
    7
    Shareholders
    Acquiror Stock
    Target Stock
    Target
    Acquiror
    • Acquiror’s basis in Target stock is the same as the Shareholder’s Solely for voting stock
    • 21. No Boot in a B
    • 22. Reorganization Expenses – distinguish between Target expenses and Target Shareholder expenses (Rev. Rul. 73-54)
    • 23. Creeping B – old and cold stock purchased for cash should not be integrated with stock exchange
    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
  • 24. TYPE C REORGANIZATIONS – SECTION 368(a)(1)(C) STOCK FOR ASSETS
    8
    Shareholders
    Acquiror
    Stock
    Acquiror Stock
    Target
    Acquiror
    Target Assets
    • Acquisition of substantially all of the assets of Target, by Acquiror in exchange for Acquiror voting stock
    • 25. “Substantially All” – at least 90% of FMV of Net Assets and at least 70% of FMV of Gross Assets
    • 26. Target must liquidate in the reorganization
    • 27. 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
    • 28. Reorganization Expenses – Aquiror may assume expenses (Rev. Rul. 73-54)
    • 29. Assumption of stock options not boot
    • 30. Bridge loans by Acquiror are boot
    • 31. Redemptions and Dividends – who pays and source of funds
  • TYPE D REORGANIZATIONS – SECTION 368(a)(1)(D) DIVISIVE SPIN OFF, SPLIT OFF, SPLIT UP
    9
    Shareholders
    Transferee
    Stock
    Transferee Stock
    Transferor
    Transferee
    Transferor Assets
    • 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.
  • TYPE D REORGANIZATIONS – SECTION 368(a)(1)(D) NON-DIVISIVE
    10
    Merger Treated as Acquisitive D
    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
    Shareholders with 20%
    Acquiror
    Stock
    Acquiror Stock
    Transferor
    Acquiror
    Transferor Assets
    Merger
    Failed Type C Treated as D
    Liquidation / Reincorporation
    Shareholders
    Shareholders
    50%
    Assets
    Stock
    Assets
    Stock
    Assets
    Transferor
    Acquiror
    Transferor
    Acquiror
    Cash & Stock
  • 32. TRI-ANGULAR OR SUBSIDIARY MERGERS
    11
    1. Forward Subsidiary Merger
    T
    P
    S
    2. Reverse Subsidiary Merger
    T
    P
    S
    Key:
    T = Target P = Acquiror S = Merger Sub
  • 33. TRI-ANGULAR OR SUBSIDIARY MERGERS
    12
    Tax Consequences
    • Merger Sub takes Target’s basis in assets increased by gain recognized by Target
    • 34. P takes “drop down” basis in stock of Merger Sub (same as asset basis)
    T Shareholders
    P Stock
    T
    P
    80%
    Merger
    Sub Survives
    S
    Section 368(a)(2)(D) Forward Triangular Merger
    A statutory merger of Target into Merger Sub (at least 80% owned by P)
    Substantially all of Target’s assets acquired by Merger Sub
    Would have been a good Type A merger if Target had merged into P
    Key:
    T = Target P = Acquiror S = Merger Sub
  • 35. TRI-ANGULAR OR SUBSIDIARY MERGERS
    13
    Tax Consequences
    • Non-taxable to Target and carryover basis
    • 36. No gain to P and Merger Sub under Sections 1032 and 361
    • 37. No gain to Target shareholders except to the extent of boot
    • 38. P’s basis in Target stock generally is the asset basis, but P can choose to take Target shareholders basis in stock (if it is also a B)
    • 39. If transaction is also a 351, P can use Target shareholders’ basis plus gain
    T Shareholders
    P Stock
    T
    P
    80%
    Merger
    Target Survives
    S
    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 P voting stock and (ii) Target holds substantially all the assets of Target and Merger Sub
    Key:
    T = Target P = Acquiror S = Merger Sub
  • 40. TAXABLE STOCK PURCHASES
    14
    Cash Reverse Triangular Merger
    Treated as Stock Sale
    T Shareholders
    Cash
    T
    P
    Merger
    Target Survives
    S
    Shareholders have gain or loss
    P takes cost basis in Target shares
    Key:
    T = Target P = Acquiror S = Merger Sub
  • 41. CASH FORWARD MERGER
    15
    T Shareholders
    Asset sale followed by liquidation of Target
    Target has gain on sale
    Target shareholders have gain on liquidation (unless 332 applies)
    P takes cost basis in Target assets
    T
    P
    Merger
    P Survives
    Variation with Merger Sub:
    T Shareholders
    T
    P
    Merger
    Sub Survives
    S
    Key:
    T = Target P = Acquiror S = Merger Sub
  • 42. NET VALUE RULES
    16
    2005 Proposed Regulation 1.368-1(b)(1): Exchange of no net value (liabilities exceed value) does not qualify as a reorganization
    Example:
    P owns all of the stock of both S and T. T has assets with FMV of $100 and liabilities of $160, all of which are owed to B. T transfers all of its assets to S in exchange for the assumption of T’s liabilities, and T dissolves. The obligation to B is outstanding immediately after the transfer. P receives nothing in exchange for its T stock. Under paragraph (f)(2)(i) of the Reg, T does not surrender net value because the FMV of the property transferred by T ($100) does not exceed the sum of the amount of liabilities of T assumed by S 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
  • 43. SECTION 382 – LIMITATION ON LOSSES AFTER CHANGE IN OWNERSHIP
    17
    • Section 381 – Survival of Tax Attributes
    • 44. Section 382
    • 45. 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
    • 46. “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.
  • NON-QUALIFIED PREFERRED STOCK
    18
    • 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
    • 47. (2) issuer is required to redeem
    • 48. (3) issuer has right to redeem and is more likely than not to exercise that right; or
    • 49. (4) dividend rate varies based on interest rate, or commodity price or other index
    • 50. Redemption right exercisable within 20 years and not subject to contingency that renders likelihood remote
    • 51. Excludes stock compensation that may be repurchased on separation from service
    • 52. Conversion feature not enough to participate in growth
    • 53. Generally treated as boot to shareholders
  • TARGET DEBT SECURITIES
    19
    Exchange of Target securities for P securities is tax free under Sections 354 and 356, to the extent that the principal amount of P 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 P stock or debt worth $900; Target has COD of $100
  • 54. DIVIDEND EQUIVALENCY
    20
    • Section 356(a)(2) – Boot as dividend or capital gain; post-reorganization redemption test of Rev. Rul. 93-61
    • 55. Clark – hypothetical post-reorganization redemption reduced shareholder’s interest from 1.32% to .92% - substantially disproportionate under Section 302(b)(2)
    • 56. Section 302(b)(1) – redemption that results in meaningful reduction in voting power is redemption and not essentially equivalent to a dividend
    • 57. Section 302(b)(2) – greater than 20% reduction is substantially disproportionate
    • 58. E&P Limitation on Dividend – should be Target’s E&P but unclear if P’s E&P counted; PLR 9118025, PLR 9041086, and PLR 9039029
  • CONTINGENT STOCK, ESCROWS, AND EARN-OUTS
    21
    • Escrows:
    • 59. Target shareholders usually treated as owner of escrowed P shares unless otherwise agreed
    • 60. especially true if Target shareholders have right to vote and receive dividends
    • 61. not clear who is owner if Target shareholders do not have right to vote or receive dividends
    • 62. Earn-Out Stock:
    • 63. Target shareholders not considered owners until P shares are issued
    • 64. Not treated as boot
    • 65. Imputed Interest
    • 66. Rev. Proc. 84-42 Ruling Guidelines – use of escrow or contingent stock
    • 67. (1) stock must be distributed within 5 years, subject to escrow or contingency
    • 68. (2) valid business purpose
    • 69. (3) maximum number of shares cannot exceed 50%
    • 70. (4) trigger event not controlled by Target shareholders and not based on tax liability
    • 71. (5) Formula is objective and readily ascertainable
    • 72. (6) Restrictions on assignment and substitution
    • 73. (7) In the case of escrows, P shares shown as issued to Target shareholders, current voting and dividend rights, and vested
  • BUSTED 351
    22
    T Shareholder
    Shareholders
    P Stock
    Stock
    Business
    P
    Merger
    T
    Rev. Ruling 70-140
    Step 1: Incorporate T
    Step 2: Merge T into P
  • 74. Double Merger
    23
    REV. RUL. 2001-46
    Step 2: A-type forward merger
    Step 1: Reverse triangular merger
    T Shareholders
    T Shareholders
    P Stock+cash
    Acquiror
    Target
    Acquiror
    Merger
    Sub Survives
    80%
    Merger
    Target Survives
    Merger Sub
    Merger Sub
    Target+Sub
    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.
  • 75. Double Merger – Wholly Owned LLC
    24
    REV. RUL. 2001-46
    Step 2: A-type forward merger
    Step 1: Reverse triangular merger
    T Shareholders
    T Shareholders
    P Stock+cash
    Acquiror
    Target
    Acquiror
    Merger
    LLC Survives
    80%
    Merger
    Target Survives
    LLC
    Merger Sub
    Target+Sub
    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.
  • 76. USE OF WHOLLY OWNED LLC
    25
    T Shareholders
    P Stock
    Target
    Acquiror
    Merger
    LLC Survives
    LLC
    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
    • 77. A Type Reorganization
  • SECTION 351 / 721 ROLLOVER
    26
    T Shareholders
    • 80% vote & value
    • 78. taxation of boot
    • 79. debt + non-qualified voting stock
    • 80. assumption of liabilities
    PEG
    Target
    Cash out some and rollover
    T Shareholders
    Cash
    T Shareholders
    PEG
    Cash
    Cash
    Target
    PEG
    T Shares
    Cash
    Assets
    Cash
    NewCo
    NewCo
    Target
    Assets
  • 81. LLC TECHNIQUES
    Step 1
    Step 2
    T Shareholders
    Former T Shareholders
    $
    Target Corp.
    Acquiror
    LLC
    Target
    Merger
    LLC Survives
    LLC
    Target
    27
  • 82. FOREIGN CORPORATIONS
    28
    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
  • 83. FOREIGN CORPORATIONS
    29
    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.
  • 84. 1248 AMOUNT ON SALE OF CONTROLLED FOREIGN CORPORATION
    30
    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
  • 85. JOINT VENTURE STRUCTURES
    31
    Foreign Company
    US Company
    Cash
    Assets & Liabilities
    Section 367 Issues
    Disguised Sale
    LLC
    US & Foreign Assets
  • 86. INSTALLMENT METHOD
    32
    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
  • 87. CONTINGENT PAYMENTS AND EARN-OUTS
    33
    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
  • 88. CONTINGENT PAYMENTS AND GAIN RECOGNITION
    34
    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
  • 89. SECTION 338 ELECTION
    35
    • Section 338(g) – Target in stock sale treated as selling all its assets followed by liquidation post close (soaks up NOLs)
    • 90. Section 338(h)(10) – Sale and liquidation deemed to occur pre-close; joint election; S corporation or sale out of a consolidated group
    • 91. 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))
    • 92. Adjusted Deemed Sale Price – grossed up amount realized of recently purchased stock plus liabilities of old T (on day after acquisition date)
  • 338(g) ELECTIONS
    36
    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
  • 93. PURCHASE PRICE ALLOCATION
    37
    • Asset Sale or 338 Election
    • 94. Sections 1060 and 338 classes based on FMV
    • 95. Class I – cash and equivalents
    • 96. Class II – actively traded personal property under 1092
    • 97. Class III – debt instruments and marked to market
    • 98. Class IV – inventory
    • 99. Class V – assets other than those in I-IV or VI
    • 100. Class VI – goodwill and going concern
    • 101. Agreement Allocations – Danielson Rule
    • 102. Parties bound by agreement unless IRS determines that the allocation is NOT appropriate
    • 103. SFAS 141R – Purchase Price Allocations 
    • 104. Assets booked at FMV as of closing date (not signing date)
    • 105. Bargain purchase results in accounting gain
    • 106. Earn Outs – estimated and recorded
    • 107. Deferred tax assets for excess tax deductible goodwill over book value
    • 108. Transaction related costs recognized (expensed)
  • UNVESTED STOCK RECEIVED IN A TAXABLE OR NON-TAXABLE DEAL
    38
    • Rev. Rul. 2007-49 - The revenue ruling addresses:
    • 109. (1) the exchange of fully vested stock for unvested stock of an acquiring corporation in a tax-free reorganization, and
    • 110. (2) the exchange of fully vested stock for unvested stock of an acquiring corporation in a taxable exchange
    • 111. Under either (1) or (2), the Rev. Rul. provides that the exchange constitutes a transfer of property subject to Section 83. Thus, 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.
  • OPTIONS
    39
    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)
  • 112. OPTIONS – CASH OUT
    40
    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
  • 113. 409A
    41
    • Deferred compensation
    • 114. 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)
    • 115. Consequences of violating 409A
    • 116. Amounts which were to be deferred are subject to immediate taxation
    • 117. Additional 20% penalty on such amounts
    • 118. Interest penalty
    • 119. CA state tax penalty
    • 120. Bonus or Carve Out Plans
    • 121. Participation in Earn Outs (Reg. 1.409A-3(i)(5)(iv))
    • 122. 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
  • 280G GOLDEN PARACHUTE RULES
    42
    • 20% excise tax and loss of deduction on Excess Parachute Payment
    • 123. “Excess Parachute Payment” means the amount by which the Parachute Payment exceeds the Base Amount
    • 124. “Parachute Payment” means a payment, the present value of which, exceeds three times the Base Amount
    • 125. “Base Amount” means the average annual compensation for past 5 years
    • 126. Must be paid to a disqualified individual (meaning employee, officer, shareholder, or highly compensated individual)
    • 127. As compensation, AND
    • 128. Contingent on a change in control (50% change ownership or effective control, or ownership change in a substantial portion of the company’s assets)
    • 129. Reduce Excess for reasonable compensation
    • 130. Exclude reasonable compensation for future services
    • 131. Exception for small business corporation and non publicly traded corporation that has 75% uninterested shareholder approval
    • 132. Withholding requirement
  • 280G – OTHER ISSUES
    43
    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
  • 133. S CORPORATIONS AND 338(h)(10)
    44
    T Shareholders
    Cash and Notes
    • Character difference – ordinary income assets
    • 134. California 1.5% tax on S corporations
    • 135. All Target shareholders must consent on Form 8023
    • 136. Deemed 338 election for subsidiaries
    • 137. 1374 – BIG Tax
    • 138. Minority shareholders in rollover
    • 139. Hidden tax in liquidation or deemed liquidation in installment sale.
    T (S Corp)
    P
    Reverse subsidiary cash merger
    S
    Key:
    T = Target P = Acquiror S = Merger Sub
  • 140. S CORP 338(h)(10) ELECTION AND
    453B(h) BASIS ALLOCATION ISSUE
    45
    Shareholders
    $1 million basis
    $1 million cash
    $4 million 453 Note
    Target
    Acquiror
    Stock Sale
    Reg. 1.338(h)(10) – 1(e) Example 10
    Cash - $1 million / $1 million A/B
    Assets - $4 million / zero A/B
    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%
  • 141. S CORP NO 338(h)(10) ELECTION – DISAPPEARING BASIS
    46
    T Shareholders
    Cash
    Liquidate Target into Merger Sub or check the box Q-Sub
    T (S Corp)
    P
    S
    Merger
    Carryover Basis
    Key:
    T = Target P = Acquiror S = Merger Sub
  • 142. 47
    PALO ALTO
    2600 El Camino Real
    Suite 110
    Palo Alto, CA 94306
    SAN JOSE
    10 Almaden Blvd.
    Suite 1250
    San Jose, CA 95113
    LOS ANGELES
    10900 Wilshire Blvd.
    Suite 300
    Los Angeles, CA 90024
    SAN FRANCISCO
    155 Sansome Street
    Suite 500
    San Francisco, CA 94104
    www.rroyselaw.com

×