Raleigh TEI (Sept 2015) - A Tax Professionals Guide to Acquisition

A Tax Professional’s Guide to Acquisition
TEI – Carolinas Chapter
Todd Schroeder
Matthew Mauney
Raleigh, NC
September 25, 2015
Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common
terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an
"office" means an office of any such law firm.
© 2015 Baker & McKenzie LLP
– Crafting Acquisition Agreements
– Tax Representations and Due Diligence
– Tax Compliance and Tax Costs
– Tax Treatment Indemnity Payments
– Escrow Considerations
– Transaction Expenses
©2015 Baker & McKenzie 2
©2012 Baker & McKenzie 3
General items to consider - Seller
– What type of process is the sale process?
– Auction
– Strategic disposition
– Anti-trust
– Is tax-free transaction available?
– Stock sale v. asset sale?
– Who is the Buyer?
– Competitor
– Private equity
– Are we the target?
©2015 Baker & McKenzie 4
General items to consider - Buyer
– What type of transaction is it?
– Auction
– Strategic disposition
– Anti-trust
– Stock sale v. asset sale
– Who is the Seller?
– Competitor
– Private equity
– Is the target a widely held company?
– Impact of stock option expense deductions
©2015 Baker & McKenzie 5
Stock vs. Asset Transactions
Taxable Stock Acquisition
Taxable Asset Acquisition
Buyer gets FMV tax basis in assets
Target’s NOLs not available to Buyer •
No carryover of tax methods
No transfer of historic liabilities to
Increases structuring flexibility
Usually a double level of tax for
corporate Seller and its shareholders
Generally Buyer’s preference
Buyer gets carryover tax basis in assets
Tax attributes (including NOLs) generally
carryover, subject to limitations
Usually single level of tax for Seller unless
Target is a sub of consolidated group
Historic liabilities of Target transfer to
Generally an individual Seller’s preference
(if transaction is not tax free)
Section 338 Election: Step-up in basis of
assets but NOLs not available (distributed
to Seller under Section 381)
©2015 Baker & McKenzie 6
and Due
©2012 Baker & McKenzie 7
Role of tax representations
– Role of tax representations can vary depending on type
of transaction
– Generally 3 primary purposes
– Due diligence
– Indemnity
– Walk away rights
©2015 Baker & McKenzie 8
Tax representations – Issues to consider
– Survival periods
– Disclosures for exceptions to representations
– Stock sales v. assets sales
– Public v. private transactions
– Representations in other sections that could impact tax
©2015 Baker & McKenzie 9
Tax Due Diligence
– Seller Due Diligence
– Identify what will be sold
– Quantify cost of sale
– Confirm possible indemnification risks
– Determine historic exposures remaining with Seller
– Identify transfer tax costs of transaction
©2015 Baker & McKenzie 10
Tax Due Diligence
– Buyer Due Diligence
– Identify possible tax exposures that Buyer could be
responsible for after closing.
– Timing of due diligence
– Pre-Signing v. Pre-Closing
– Quantify the impact of possible limitations of postclosing use of attributes/incentives
– Consider post-acquisition integration plan
– Identify transfer tax costs of transaction
– Confirm whether withholding applies to purchase
©2015 Baker & McKenzie 11
©2012 Baker & McKenzie 12
– Applies to all sales of real property located in the United
– Applies to the sale of a domestic corporation if the target
owns a significant amount of U.S. real property, in terms
of asset fair market values
– Purchaser must withhold 10% of the consideration unless
an exception applies, e.g., receipt of withholding
– Certificate of non-foreign status or non-USRPI
©2015 Baker & McKenzie 13
Tax Compliance
and Tax Costs
©2012 Baker & McKenzie 14
Tax Compliance
– Tax return preparation
– Direct taxes
– Indirect taxes
– Straddle period taxes
– Tax audits
– Amended tax returns
©2015 Baker & McKenzie 15
Tax Costs
– Purchase price allocation
– Covenants not to compete
– Tax indemnification
– Withholding taxes
– Transfer taxes
– Caps and deductibles
– Purchaser tax acts
– Current and deferred tax liabilities
©2015 Baker & McKenzie 16
Tax Treatment of
©2012 Baker & McKenzie 17
Tax Treatment of Indemnity Payments
– Applies to all indemnity payments, not just tax
– Computational approaches
– Purchase price adjustment
– Gross-up for taxes
– Tax-effected
©2015 Baker & McKenzie 18
©2012 Baker & McKenzie 19
Who Owns the Escrowed Property?
– What is the contingency?
– Separate tax escrow?
– Which party is entitled to income earned on the escrowed
– Which entity is allocated the annual tax liability?
– Installment sale implications
©2015 Baker & McKenzie 20
©2012 Baker & McKenzie 21
Buyer Expenses
– Generally, costs incurred in a taxable acquisition are
capitalized into the acquired stock or assets
– capitalized costs include those paid on or after the
earlier of: (1) delivery of LOI, offer letter or other
similar proposal; or (2) board approval of the
– expenses incurred before that time still must be
capitalized if they are “inherently facilitative,” e.g.,
valuation of target, negotiations, or structuring
– If the acquisition fails, the costs are recoverable
©2015 Baker & McKenzie 22
Seller Expenses
– Does the expense create a benefit beyond one year or
create a separate asset?
– Costs to fend of hostile acquisitions should be
– Break-up fees should be deductible
– Cash settlement of employee stock rights should be
deductible as compensation
– Constructive dividend to shareholders when paid as part
of a stock acquisition?
– 70% deductibility safe harbor for success-based fees
©2015 Baker & McKenzie 23
Thank You
Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common
terminology used in professional service organizations, reference within the organization to a “partner” means a person who is a
partner, or equivalent, in a member firm or its affiliate. Similarly, reference to an “office” means an office of any such law firm.
©2015 Baker & McKenzie 24