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I'm looking at the answer about tax consequences of a c

Customer Question
corporation merged into an s...
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: 1 year ago.Category: Tax
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7/21/2016
Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 13,267
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
Verified

Hi,

...

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.

...

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

...

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

...

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

...

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

...

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

...

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:

...

(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).

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago

The results, respectively, are as follows:

...

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”

...

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”

...

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”

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago

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

...

(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)).

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago

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

...

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.)

...

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

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year 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”.

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year 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

...

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

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago

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

...

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

...

“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.

...

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.

...

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?

...

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:

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year 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

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago

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

...

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

...

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.

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago

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

...

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

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago

Hi,

...

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

...

Did my answer help?

...

Let me know…

...

Thanks

Lane

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Lane
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 13,267
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Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986

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