Reverse triangular merger tax treatment

 

Yet, the transaction’s many state law What are the differences in tax treatment between an acquisition of stock in a company and the acquisition of business assets and liabilities? reverse triangular mergers - a subsidiary of the This program will also assist you in evaluating whether to structure a transaction as a forward triangular merger or a reverse triangular merger, and whether to use a tax-free or taxable structure. merges into Target . Merger Co. Summary. Learning Objectives: You will be able to review requirements for tax-free FTM or RTM. The Merger was treated as a “tax free exchange” under Section 368 of the Internal Revenue Code of 1986, as amended. The feasibility of using the tax-free reverse triangular merger provisions of section 368(a) (2) (E) of the Code will be explored first, followed by a discussion of the use of the forward triangular merger provisions of section 368(a) (2) (D). While reviewing each of the deal structures Line 17 – List the applicable Internal Revenue Code section(s) and subsection(s) upon which the tax treatment is based. Based on the facts, the transaction qualifies as a tax-free corporate reorganization under §368(a)(2)(E). Tax-Free Mergers & Reorganizations. Internal Revenue Code (IRC) Section 368 allows merger and acquisition transactions to qualify as a reorganization when an acquiring corporation gives a substantial amount of its own stock as consideration to the acquired (or “target”) corporation. Stock Acquisition Elections (IRC Section 338 (h) (10) & IRC Section 336 (e) Elections) Therefore, the merger of P into New P qualifies as a reorganization under section 368(a)(1)(F). Forward Triangular Merger: §368(a)(2)(D) Section 368 Acquisitions - Triangular Reorg Reverse triangular merger (acquirer forms wholly-owned shell corporation, shell corporation merges into target corporation, and target shareholders receives shares of the acquiring parent corporation). (S corporation) Acquisition Sub Operating Company (QSub) Portfolio United States (US) tax law regarding mergers and acquisitions (M&A) is extensive and complex. Section 368 has several conditions which “A” reorganization structured as a reverse triangular merger occurs if stock of the parent corporation in control of the subsidiary is used in a transaction in which the subsidiary is merged into the acquired corporation. Line 18 – Can any resulting loss be recognized? Mergers and Acquisitions of Closely-Held Corporations. Advising pursuant to statutory mergers and consolidations under 368(a)(1)(A), reverse triangular mergers under 368(a)(2)(E), and forward triangular mergers under 368(a)(2)(D); Advising on business purpose, continuity of shareholder interest, continuity of business enterprise; exist as a result of the merger. Sec. Reverse triangular merger. The second step was an upstream merger of the target into the acquiring entity. 90-95, 1990-2 C. 77-307 (Substantially All Properties in Reverse Triangular Merger) This section will examine the treatment of contractual rights in connection with four common M&A structures: (i) reverse triangular mergers, (ii) forward-triangular mergers, (iii) stock purchases, and (iv) asset purchases. M. A reverse triangular merger allows the acquirer to complete an acquisition The former Chrysler shareholders had three theories for tax-free treatment of the exchange of their Chrysler shares. Yet, the transaction’s many state law generally be a carryover basis in the event of a stock acquisition (except for a reverse triangular merger where this basis will be the target’s asset basis); the target’s stock will generally retain historic basis in an asset acquisition. A reverse triangular merger may qualify as a tax-free reorganization when 80% of the seller’s stock is acquired with the voting stock of the buyer; the non-stock consideration may not exceed 20% Reverse Triangular Mergers: (a)(2)(E) Reorganizations This portion of the introduction to the basic principles of United States federal income taxation of corporate acquisitions is part of the Pillsbury Winthrop Shaw Pittman LLP Tax Page, a World Wide Web demonstration project. merger subsidiary that merges with and into the existing U. 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). This article focuses on how the form of a merger of partnerships or LLCs can trigger gain and affect the basis the resulting entities have in assets. Double mergers have been used for over a decade as a tool to ensure that certain mergers will qualify as tax-free under U. federal income tax A reverse triangular merger occurs when the subsidiary of the acquiring parent merges into the acquired company, the opposite of the forward triangular merger. 302 U. Analysis The new Ruling discusses at length an earlier ruling (Rev. However, first step is a qualified stock purchase for §338 purposes. For more information regarding M&A deal structures, please see here and here. triangular merger or triangular C reorganization, is the determination of whether substantially all treatment as a tax-free type of reorganization of businesses Merger would itself qualify as a nontax-able “reverse triangular merger” under Code sections 368(a)(1)(A) and 368(a)(2)(E). Unless an additional step is taken after the flip, P, now a subsidiary of S, continues to own the S shares it owned before the flip. According to Regs. (e) The target corporation will not recognize gain or loss. Therefore, does the step transaction doctrine apply here? Step 1: Reverse Triangular Merger . Section 368(a)(2)(E), Reg. Immediately after the merger, C merged into A in a transaction Typically, an inversion was implemented as a reverse triangular merger with Parent being the newly formed foreign parent that in turn forms Acquiring as a transitory U. Reverse triangular cash merger: a) Purchaser (P) forms a transitory subsidiary & that new sub then merges into Target; and b) Target shareholders receive cash (and notes) of purchaser. Rul. Bear Stearns survived the merger, as a wholly-owned subsidiary of JPMorgan Chase. The target becomes a subsidiary of the acquirer and, thus, maintains its legal identity while the owners of the targets stock change (much like a reverse triangular merger under 368 A). This is also known as a “Reverse Triangular Merger. Typically, an inversion was implemented as a reverse triangular merger with Parent being the newly formed foreign parent that in turn forms Acquiring as a transitory U. 2. Merger Reverse Triangular Merger Acquisition Subsidiary merges into Target, with Target as surviving corporation and Acquisition Subsidiary cease to exist as corporate entity All assets and liabilities of the Target remain in the Target (with all of the assets and liabilities of Acquisition Subsidiary going to Target) 2 Tax Treatment of Mergers. terest in the other. Nevertheless, we requested guidance on the federal income tax treatment of a reverse triangular merger when the potential for a divisive transaction does not exist. Immediately after the merger, C merged into A in a transaction Mergers and Acquisitions of Closely-Held Corporations. Shareholder Target Management Group Parent Company Acquisitions, Inc. 73-257 (Forward Triangular Merger With Liabilities Assumed by Parent & by Subsidiary) Rev. This allows the shareholders to receive 20% of the total consideration in cash. Reverse Triangular Merger P’s sub Y-1 merges into T, but T is a wholly owned sub of S, Inc. of stock in that the acquirer sub is merged into the target with the target surviving. In this variation, the acquiring corporation merges its own subsidiary with the target company, leaving the target company as the surviving entity. Tax Treatment of Target Shareholders A traditional de-SPAC transaction is structured as a “reverse triangular merger” for federal income tax purposes. Flips involve one unusual issue. Requirements to Qualify for Tax-free Treatment Under IRC 368(a)(1)(B) 100% of the consideration used in the acquisition must be voting stock of the acquirer. reverse triangular mergers, the tax consequences of that merger on the participants of that merger must flow from §368(a)(2)(E) rather than from §351. 4 Reverse Triangular Mergers are Stock Acquisitions for Tax Election to Treat a Reverse Triangular Merger as an Asset Acquisition The Merger should be tax-free to the Company, the convertible note holders, as well as the common and preferred stock shareholders. A triangular merger is commonly used to keep the liabilities of the target in a separate corporation (which protects the parent from any contingent or unknown liabilities, or any future liabilities that may arise from the acquired business). In addition, P, S, and T are corporations described in Taxpayer acquired Target's stock in a taxable reverse triangular merger. The important difference is that a forward triangular merger can be tax-free even if up to 60 percent of the aggregate consideration is payable in cash. But in a reverse triangular merger, the acquirer’s basis in the target’s stock is determined by a somewhat more fictional process. 454 (1938). S. Also known as a reverse triangular merger, an “E” Reorganization involves merging a subsidiary corporation of the buyer into the target. 1. Because the P shares received by A in respect of • The reason for using a reverse triangular merger is that sometimes Target has assets that cannot be transferred (A reverse triangular merger keeps Target intact as the surviving corporation). For more information on a Section 338(h)(10) election, see Practice Notes, Stock Acquisitions: Tax Overview: Stock Acquisitions Treated as Asset Acquisitions and Mergers: Tax Overview: Box, Tax Election to Treat a Reverse Triangular Merger Reverse Triangular Merger P’s sub Y-1 merges into T, but T is a wholly owned sub of S, Inc. A reverse triangular merger is a type of merger plan used when forming or absorbing a company. Merger Sub . Second, it disregarded the creation of S and its merger into T pursuant to Revenue Ruling 73-427, 9 . 7. The tax treatment to the target shareholders generally is consistent with sale and liquidation treatment. Another form of business combination involves the acquisition or sale of assets of an entity. February 20, 2018. Shareholders of the target receive SPAC stock in exchange for their target shares. Under paragraph (m)(3)(ii) of this section, the qualification of the merger of P into New P as a reorganization under section 368(a)(1)(F) does not alter the tax treatment of the merger of T into S. How a merger is taxed depends on its structure. Target Acquiror . "Reverse triangle mergers" happen when the acquiring company's subsidiary mergers into the target company. While reviewing each of the deal structures If the clause triggering a required consent is a change-of-control and the transaction is structured as a stock purchase or reverse triangular merger, there is no particular workaround that is widely utilized to avoid a default under or termination of the contract so triggered, although one could envision some theoretical possibilities. Type “A” Reorganization – Reverse Triangular Merger . United States (US) tax law regarding mergers and acquisitions (M&A) is extensive and complex. 1502-75(d)(3). Generally, forward and forward triangle mergers are taxed as asset purchases while reverse Rev. 74-297 (Merger into Foreign Corporation's Domestic Subsidiary) Rev. 67) and regulations under Code section 338 (the provision concerning the treatment of “qualified stock pur- What’s the main difference between asset deals and stock deals when it comes to tax treatment? What’s a forward triangular merger? What’s a reverse triangular merger? What’s a potential advantage of reverse triangular mergers as compared to forward triangular mergers? When might a tender offer be a good structure to use for a deal? A reverse triangular merger is similar to a forward triangular merger, except that the target company is the surviving entity, instead of the wholly-owned subsidiary of the buyer. , the surviving entity in the Merger, became a wholly-owned subsidiary of Quanta, Inc. ” Most public company tax-free deals use this form of reorganization (T survives) Acquiror Merger . Reverse Triangular Merger (Tax Free Stock Purchase)--Most commonly used to effect tax-free stock acquisitions. Triangular merger provisions perfectly encapsulate the problem. Guidance for applying the provisions of the Internal Revenue Code of 1986, as amended (Code), is generally provided by the US Treasury Department (Treasury) and Internal Revenue Service (IRS) by means of Treasury Department regulations, revenue rulings, revenue procedures, private letter rulings University of Miami Law Review Volume 51 Number 3 Mergers and Acquisitions Symposium Sponsored by a grant from the Dr. parent, Target, with Target surviving as a wholly owned subsidiary of Parent and the Target shareholders becoming Subsection 368(a)(2)(E) Reorganizations – The Reverse Triangular Merger Finally, the third merger variation is the “reverse triangular merger” under subsection 368(a)(2)(E). , allowing more work to be done post-closing as opposed to prior to terest in the other. if integrated with a subsequent upstream merger of T into P. 358-6, the transaction is examined as if the target had merged into the acquirer, and the assets and liabilities are then dropped into the acquisition subsidiary. Instead of following direct merger or forward triangular merger plans, this kind of a merger consists of the acquiring or parent company creating a subsidiary, which then goes on to purchase another company. What’s the main difference between asset deals and stock deals when it comes to tax treatment? What’s a forward triangular merger? What’s a reverse triangular merger? What’s a potential advantage of reverse triangular mergers as compared to forward triangular mergers? When might a tender offer be a good structure to use for a deal? reorganization” is a forward triangular merger, a triangular C reorganization, a reverse triangular merger, or a triangular B reorganization, as those terms are defined in §1. Co. The reverse triangular merger would A reverse triangular merger is subject to more stringent requirements than a straight merger or forward triangular merger in order to constitute a tax-free reorganization. Subsection 368(a)(2)(E) Reorganizations – The Reverse Triangular Merger Finally, the third merger variation is the “reverse triangular merger” under subsection 368(a)(2)(E). The reverse triangular merger would The staff considers a public shell reverse acquisition to be a capital transaction in substance, rather than a business combination. SHs See full list on investmentbank. Similar to the tax-free “Reverse Triangular Merger. ” Shareholders are treated as selling Target stock to P in taxable sale. Major Topics Mechanics and timelines of M&A deals Structures of taxable asset acquisitions and€stock acquisitions Triangular and reverse triangular mergers Structuring and pricing an acquisition generally be a carryover basis in the event of a stock acquisition (except for a reverse triangular merger where this basis will be the target’s asset basis); the target’s stock will generally retain historic basis in an asset acquisition. Except as otherwise provided in this paragraph (c)(2), P 's basis in its T stock acquired in a reverse triangular merger equals its basis in its S stock immediately before the transaction adjusted as if T had merged into S in a forward triangular merger to which paragraph (c)(1) of this section applies. Guidance for applying the provisions of the Internal Revenue Code of 1986, as amended (Code), is generally provided by the US Treasury Department (Treasury) and Internal Revenue Service (IRS) by means of Treasury Department regulations, revenue rulings, revenue procedures, private letter rulings Reverse triangular merger. 368 Reorganization Taxation. 18 P T Merger Sh/s S Double Merger Transactions. As a result of the Merger, Bioanomaly, Inc. and treated NEWCO as having purchased for cash all of the publicly held T stock. Section 368 of the Internal Revenue Code is the quintessential form-driven tax statute, but Congress cannot predict every new form. Step 2: A-type Forward Merger . This practice note provides an overview of the tax treatment of basic merger structures, the benefits of a reverse triangular merger, and the double merger solution. In a C reorganization, the target must distribute all its properties, as well as the stock and securities received in the acquisition, to its shareholders or creditors. com A reverse triangular merger is a type of merger plan used when forming or absorbing a company. The target shareholders must give up at least 80% of their stock in the target in exchange for voting stock of the buyer. Reverse Triangular Merger Under Section 368(a)(2)(E) – Acquisition Sub Mergers into Target and Target Shareholders Receive Stock in Parent Company. In a reverse triangle merger, the acquired company's shareholders will still receive one of the following from the acquiring company: There is further disparate treatment between how the secretary of state treats horizontal mergers and reverse triangle mergers, even though these mergers are substantially similar for accounting, financial reporting, and income tax purposes. While no Delaware court had previously addressed the treatment of a reverse triangular merger, practitioners and legal commentators have viewed reverse triangular mergers as analogous to stock acquisitions in not constituting an assignment by operation of law as to the surviving entity. Target stockholders receive stock of Acquiror (and boot) 3. Asset Acquisitions/Sales. T . reorganization” is a forward triangular merger, a triangular C reorganization, a reverse triangular merger, or a triangular B reorganization, as those terms are defined in §1. 15. 4 Reverse Triangular Mergers are Stock Acquisitions for Tax Election to Treat a Reverse Triangular Merger as an Asset Acquisition The integrated second merger causes the entire transaction to be treated as a forward triangular merger governed by Section 368(a)(2)(D) of the Internal Revenue Code. ” A traditional de-SPAC transaction is structured as a “reverse triangular merger” for federal income tax purposes. " Thus, A achieved a tax-free exchange, while the cash purchase of publicly held T stock set the stage for a This section will examine the treatment of contractual rights in connection with four common M&A structures: (i) reverse triangular mergers, (ii) forward-triangular mergers, (iii) stock purchases, and (iv) asset purchases. Therefore, does the step transaction doctrine apply here? In a reverse triangular merger, a subsidiary of the target is the surviving entity. Consequently, it is not considered an actual sale as target shareholders simply exchange With our extensive experience in the tax law, we will guide you on the best entity structure, asset protection, and exit-out strategies to meet your objectives. parent, Target, with Target surviving as a wholly owned subsidiary of Parent and the Target shareholders becoming The Merger was treated as a “tax free exchange” under Section 368 of the Internal Revenue Code of 1986, as amended. filled federal tax law with complexity and hidden meaning. . Advising pursuant to statutory mergers and consolidations under 368(a)(1)(A), reverse triangular mergers under 368(a)(2)(E), and forward triangular mergers under 368(a)(2)(D); Advising on business purpose, continuity of shareholder interest, continuity of business enterprise; A reverse triangular merger is subject to more stringent requirements than a straight merger or forward triangular merger in order to constitute a tax-free reorganization. This is commonly referred to as a “reverse triangular merger. Under Delaware law, a reverse triangular merger does not constitute an assignment, as the targeted company continues as the surviving entity, and thus no third-party – Reverse Triangular Mergers tend to be the most common structure, as it allows the entity to be purchased and survive post-closing as a subsidiary of Buyer (fewer third party consents, no direct hiring of employees, etc. The shareholders of the acquired company still receive securities and/or cash from the acquiring parent and the parent’s shares in its subsidiary are converted into shares of the International tax-free statutory mergers may also take the form of reverse triangular mergers, (which will be discussed in more detail below) in which a subsidiary of the acquiring corporation is merged into the acquired corporation; these mergers must meet the requirements of Internal Revenue Code Section 368(a)(2)(E). Step 1: Reverse Triangular Merger . 368-2(j). Tax-free treatment of a forward triangular reorganization is allowed if certain detailed conditions are met, such as an existing business enterprise and the Wayne R. 82 (1937). Comments are welcome on the design or content of this material. In the first step, the acquiring corporation acquired all of the target stock for 70% stock and 30% cash in a reverse triangular merger. The reorganization, which can be tax-free or taxable, can occur in a number of ways, but one of the common transaction structures is a forward triangular merger (See Inversion Diagram). (S corporation) Acquisition Sub Operating Company (QSub) Portfolio In forward and reverse triangular mergers, the target corporation's property becomes the property of the acquiring corporation's subsidiary by operation of law. First, notwithstanding German law, the merger of Chrysler Merger Sub into Chrysler was a good reverse subsidiary merger because the requirements under the U. B. On Date W, B merged into A in a reverse triangular merger that A represents qualified under §§ 368(a)(1)(A) and 368(a)(2)(E). the accounting A forward merger requires 50 percent of the consideration to be voting stock to qualify as a tax-free reorganization. 518 Fall 2002 Session 20 Sec. 77-428, 1977-2 CB 117 , held that a flip transaction may qualify as either a forward or reverse tax-free triangular merger. Target Shareholders . As part of the acquisition, Target paid professional and administrative fees to law, accounting, investment and other professional firms and the Securities and Exchange Commission. 5 See PLR 8903074 (Oct. generally be a carryover basis in the event of a stock acquisition (except for a reverse triangular merger where this basis will be the target’s asset basis); the target’s stock will generally retain historic basis in an asset acquisition. • reverse triangular mergers, in which the buyer incorporates a subsidiary that merges into the target company, and • two-step transactions, in which the buyer acquires a controlling interest in the target through a stock purchase and follows that transaction with a merger to eliminate or “freeze out” the remaining minority stockholders. Simply put, this is the exact opposite of a forward triangle merger. (A) Treated as a forward triangular merger. Identify key sections of purchase and sale documents. A reverse triangular merger is similar to a forward triangular merger, except that the target practice is the surviving entity instead of the wholly-owned subsidiary of the buyer. Favorable Tax Treatment on Acquisitions & Dispositions. Triangular mergers were not included in § 368. 358-6(b)(2)(i) through (iv), respectively, or a reorganization described in section 368(a)(1)(G) and (a)(2)(D). QUESTIONS: Q1. 16 In a typical reverse triangle merger, the purchasing corporation forms a wholly owned corporate In the first step, the acquiring corporation acquired all of the target stock for 70% stock and 30% cash in a reverse triangular merger. 26, 1988) holding that a merger of a target REIT into a wholly- Notwithstanding the ultimate structure of the transaction, including, as discussed above, the use of a reverse triangular merger structure to avoid in most cases, the need for stockholder approval under state law, if the Target’s or the Acquirer’s securities are traded on a stock exchange, the rules of the exchange may require stockholder Given the similar treatment of mergers and consolidations of nonprofits, more recent state nonprofit corporation acts have dropped the concept of consolidation. 2 Tax Treatment of Mergers. Generally, forward and forward triangle mergers are taxed as asset purchases while reverse a tax-free exchange under section 351. In a reverse triangle merger, the acquired company's shareholders will still receive one of the following from the acquiring company: • The reason for using a reverse triangular merger is that sometimes Target has assets that cannot be transferred (A reverse triangular merger keeps Target intact as the surviving corporation). 14. Lee Pearce Foundation "Reverse triangle mergers" happen when the acquiring company's subsidiary mergers into the target company. Not a reverse triangular merger, but, an A reorg. Nonetheless, solely for purposes of determining whether the 80 percent requirement has been met so as to qualify Transferor 1 and Transferor 2 for treatment under §351, Target's shareholders 2. The applicable Internal Revenue Code sections upon which the tax treatment is based are sections 355, 358, 368, 1001, and 1223. 74-565 (Reverse Triangular Merger Treated as Triangular B Reorg) Rev. The SPAC creates a transitory merger subsidiary that merges with and into the target, with the target surviving as a subsidiary of the public SPAC. The taxpayer has represented that this merger did not constitute a reverse acquisition within the meaning of § 1. That is, the transaction is a reverse recapitalization, equivalent to the issuance of stock by the private company for the net monetary assets of the shell corporation accompanied by a recapitalization. the accounting “A” reorganization structured as a reverse triangular merger occurs if stock of the parent corporation in control of the subsidiary is used in a transaction in which the subsidiary is merged into the acquired corporation. 80% . Tax-free reorganizations. It is considered as an acquisition . 518 Fall 2002 Session 20 Tax Treatment of Target Shareholders A traditional de-SPAC transaction is structured as a “reverse triangular merger” for federal income tax purposes. Strasbaugh provides tax advice concerning: Domestic mergers and acquisitions of corporations, including forward and reverse triangular mergers and "double dummy" structures; Cross-border corporate acquisitions employing disregarded entities and hybrid entities Determine the effect of the acquisition structure on the target firm's tax attributes. Target . reorganization provisions were satisfied in substance. Although the end result of such transactions may be the same from a non-tax standpoint, the form of a transaction may significantly affect the tax treatment of the parties.

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