As a business owner, you may not expect to incur tax liability when you go through a merger, acquisition, or other related transaction. However, the Internal Revenue Code (IRC) provisions on corporate organizations and reorganizations state otherwise. As a stakeholder, you need to be aware that some restructurings result in a taxable event for you if you receive cash, a payment, or some other item of value. Failure to pay taxes on a corporate reorganization can lead to serious penalties, plus all interest that accrues on the amount you owe until paid in full.
Our team at Lehman Tax Law has extensive experience advising clients on the most challenging and sophisticated tax issues on corporate reorganizations. We can explain how and when IRS regulations impose tax consequences to you as a stakeholder, and our attorneys are prepared to advocate on your behalf in tax-related disputes. Please contact our firm to schedule a free consultation with a reorganization lawyer, and check out some of the basic concepts.
Events That May Constitute Reorganization
The key provision regarding reorganization is Section 368 of the IRC. You may trigger tax implications if you are a shareholder in a business entity that undertakes any of the following restructuring transactions:
- A merger or consolidation of separate entities;
- A stock acquisition transaction in which one corporation exchanges its shares to obtain control over another organization;
- An asset acquisition, where a company transfers real property,
- A hybrid stock and asset acquisition that results in transfer of assets through exchange of stock;
- Recapitalization, i.e., modifying a company’s debt and equity structure through an exchange of one form of financing to another – such as eliminating preferred shares from capital and replacing them with bonds;
- Certain internal changes to the company, such as formation type, corporate identity, or organizing the entity in another jurisdiction; or,
- Transfer of assets to a trustee or receiver pursuant to the bankruptcy process.
Potential Tax-Free Reorganization: There are types of mergers and acquisitions that may not trigger a taxable event, so you may not incur taxes if the transaction meets four criteria:
- Fifty percent or more of the purchase price or other consideration comes from the stock of the acquiring corporation;
- The acquiring entity moves forward in the same business in which the target organization engaged OR applies a significant percentage of assets to support a going concern for at least two years after the transaction;
- There are valid, credible reasons for the entities to complete the transaction, instead of using it to avoid taxes; and,
- The reorganization is not part of a larger acquisition or plan that does trigger a taxable event.
A Reorganization Attorney Can Assist with Complicated Tax Matters
If you need assistance understanding and handling the tax consequences of a corporate reorganization, please contact Lehman Tax Law today at 561-368-1113 or visit us online. We can set up a complimentary consultation with Richard S. Lehman, who can review your unique circumstances and advise you on potential tax implications.