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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10163
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I'm looking at the answer about tax consequences of a c

Customer Question

I'm looking at the answer about tax consequences of a c corporation merged into an s corporation. If the merger is strictly for stock I don't see any tax consequences which would make your published answer incorrect.
JA: Because laws vary from state to state, could you tell me what state is this in?
Customer: California
JA: Have you talked to a lawyer yet?
Customer: No
JA: Anything else you think the lawyer should know?
Customer: Both corporations are owned by the same individual
Submitted: 4 months ago.
Category: Tax
Expert:  Lane replied 4 months ago.

Hi,

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We experts are just users as you are (albeit with credential verified and having passed subject matter tests)... and you seem to be making the point that the SITE is incorrect.

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I would submit that the disparity of knowledge and experience among expert users here makes your point above a generalization that cannot be made.

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I would point out that you have not provided NEARLY enough information to answer your question.

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For example,if no 338(h)(10) election is made there CAN be taxation and it varies of course between buyer and seller.

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Further, if ownership is sufficiently the same, the answer changes again.

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Finally, the TYPE of merger comes into play, as well.

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For example:

A merger is the combination of two corporations into one in accordance with state corporation law. Taxable merger transactions can take three basic forms:

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(a) a direct merger of T into P, with P the survivor. As a result of this transaction, P succeeds to all of T’s assets and liabilities and T’s shareholders receive cash, notes, or other taxable consideration (or a combination thereof).

(b) a forward triangular merger of T into S (a wholly-owned corporate subsidiary of P), with S the survivor. As a result of this transaction, S succeeds to all of T’s assets and liabilities and T’s shareholders receive cash, notes, or other taxable consideration (or a combination thereof).

(c) a reverse triangular merger of S into T, with T the survivor. As a result of this transaction, T becomes a wholly-owned subsidiary of P and T’s shareholders receive cash, notes, or other taxable consideration (or a combination thereof).

Expert:  Lane replied 4 months ago.

The results, respectively, are as follows:

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A direct taxable merger will be treated as a taxable sale of assets by T to P, followed by a liquidation of T. Rev. Rul. 69-6, 1969-1 C.B. 104. The tax consequences to the parties will be as described under “Taxable Sale of Assets”

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A forward triangular merger will be treated as a taxable sale of assets by T to S, followed by the liquidation of T. The tax consequences will be as described under “Taxable Sale of Assets”

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A reverse triangular merger, on the other hand, will be treated as a sale of stock by T’s shareholders to P. The tax consequences to the parties will be as described under “Taxable Sale of Stock”

Expert:  Lane replied 4 months ago.

Now, Section 368 describes certain transactions which qualify as tax-free “reorganizations.” These include the following common acquisition techniques:

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(a) a statutory merger, or “A” reorganization (§368(a)(1)(A)), including:

  • (i) a forward triangular merger (§368(a)(2)(D)); and
  • (ii) a reverse triangular merger (§368(a)(2)(E)).

(b) an acquisition of stock for voting stock, or “B” reorganization (§368(a)(1)(B)); and

(c) an acquisition of assets for voting stock, or “C” reorganization (§368(a)(1)(C)).

Expert:  Lane replied 4 months ago.

TO satisfy 368, § 368 contains specific definitional requirements which must be met in order for a transaction to qualify as a “reorganization”.

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Generally, a corporation may merge into a “disregarded entity” (single-member limited liability company, or a qualified subsidiary of a REITs or S corporation) under specified circumstances and still qualify as a tax-free “A” or “C” reorganization. Treas. Reg., § 1.368-2.

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In addition to these statutory requirements, the courts have imposed several judicially-created requirements: continuity of interest, continuity of business enterprise and business purpose.

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I can go further into these requirements if you like (continuity of interest, continuity of business enterprise and business purpose.)

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But as you can see this is much more multifaceted than some may realize

Expert:  Lane replied 4 months ago.

By the way, I use “P” to mean the purchasing or acquiring corporation; “S” to mean a wholly-owned corporate subsidiary of P; and “T” means the acquired corporation, or “target”.

Expert:  Lane replied 4 months ago.

But GENERALLY (and that's a large caviat) you're talking about what the code calles a "B" reorganization - a tax free exchange of stock

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A “B” reorganization is defined in §368(a)(1)(B) as “the acquisition by one corporation, in exchange solely for all or a part of its voting stock ... of stock of another corporation, if immediately after the acquisition, the acquiring corporation has control of such other corporation

Expert:  Lane replied 4 months ago.

From an excellent piece, by Griffin, Lev and D' Agostine (2007)

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(particular to your statement see "11.4," below )

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“Control” is defined in §368(c) as the ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote plus at least 80% of the total number of shares of all other classes of stock of the corporation.

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11.3. In a B reorganization, the sole consideration that can be used is voting stock of either the acquiring corporation or its parent, but not both. Any other consideration (“boot”) destroys the tax-free nature of the transaction.

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11.4. If P acquires all of T’s stock solely for P voting stock, the transaction will qualify as a B reorganization. Likewise, if S acquires all of T’s stock solely for voting stock of P or S (but not both) the transaction will qualify as a B reorganization.

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11.5. In a B reorganization, T’s shareholders do not recognize gain or loss on the exchange. Rather, each T shareholder takes a substituted basis in his P stock equal to his basis in 13 the T stock surrendered. Any gain on appreciation in value of the T stock is therefore deferred until a later sale or taxable disposition of the P stock.

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11.6. T’s basis in its assets is unchanged; P may not elect to step up the basis in those assets under §338.

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11.7. T recognizes no gain or loss on the transaction and generally retains its tax attributes subject to the limitations discussed in Section XIII infra.

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11.8. P’s basis in the T stock acquired in the transaction is equal to the basis of that stock in the hands of the T shareholders. Query: how does P determine its carryover basis if T’s stock is publicly traded and held by hundreds of strangers?

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11.9. Since the existence of even a slight amount of “boot” will destroy a B reorganization, great care must be used in structuring the transaction:

Expert:  Lane replied 4 months ago.

I hope this helps to clarify - (If you'd like to past the URL of the question you refer to I'd be glad to take a look

Expert:  Lane replied 4 months ago.

Please let me know if you have any questions at all.

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If this HAS helped, and you DON’T have other questions … I'd appreciate a positive rating (using the stars or faces on your screen, and then clicking “submit")

Otherwise I’m working for no crediting at all here

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Thank you!

Lane

I hold a law degree, (Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986.

Expert:  Lane replied 4 months ago.

P.S. This is dated, but current as it relates to existing law - THis may help

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https://www.mayerbrown.com/public_docs/presentation_spelled_with_s_012507.pdf

Expert:  Lane replied 4 months ago.

Hi,

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I’m just checking back in to see how things are going.

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Did my answer help?

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Let me know…

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Thanks

Lane

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