PORTFOLIO

State Taxation of Mergers and Acquisitions (Portfolio 783)

Tax Management Portfolio, State Taxation of Mergers and Acquisitions, No. 783-4th, analyzes the state and local tax implications of mergers and acquisitions by corporate multistate taxpayers. The potentially significant state and local tax liabilities generated by these transactions often can be reduced or eliminated through proper planning.

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DESCRIPTION

Tax Management Portfolio, State Taxation of Mergers and Acquisitions, No. 783-4th, analyzes the state and local tax implications of mergers and acquisitions by corporate multistate taxpayers. The potentially significant state and local tax liabilities generated by these transactions often can be reduced or eliminated through proper planning. After presenting an overview of the types and characteristics of the primary state and local taxes, including the most common exemptions provided by the states, the Portfolio addresses the unitary business concept and various interstate income tax laws and compacts. The discussion then turns to mergers, reorganizations and property transfers in those states with specific tax exemptions. Stock and asset transactions are discussed, with planning considerations set out for each type of acquisition from the perspective of both buyers and sellers. Finally, there is a discussion of some of the principal issues that arise when the buyer has multinational operations, including the interaction of state tax regimes and foreign source income and loss.

With respect to stock acquisitions, the Portfolio discusses the advantages and disadvantages of combined or consolidated reporting, the availability of state net operating loss carryforwards, and the state tax treatment of elections under §338, including the election under §338(h)(10). From the seller's viewpoint, there is a summary of the characterization of gain from the sale of subsidiary stock as business or nonbusiness income, the constitutional limitations on state taxation of this income, and the apportionment or allocation of any such gain to the various states in which the seller does business.

With respect to asset acquisitions, the Portfolio provides planning techniques to minimize state taxation through purchase price allocations and the use of investment subsidiaries. Nexus and the effect of purchasing assets on a buyer's national or worldwide income are covered, as are the various exemptions from sales and use tax in each state upon the acquisition of assets. The buyer's potential liability for the seller's state taxes is also analyzed, with a discussion of the requirements in each state to avoid successor liability, whether through escrows, clearance certificates, or the relevant bulk transfer statutes.


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AUTHORS

GREGORY E. STERN
Gregory E. Stern, B.S.B.A., Bucknell University (1977); J.D. (with honors), University of Maryland School of Law (1980); LL.M. (Taxation), New York University School of Law (1982); law clerk to the Honorable Philip R. Miller, United States Court of Claims (1980–81); author, 541-4th T.M., Restructuring Financially Troubled Businesses: Tax Aspects; member, American Bar Association, State Bar of Texas.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

II. Overview of State Taxation

A. Sales and Use Taxes

1. In General

a. Sales Taxes

b. Use Taxes

2. Common Sales and Use Tax Exemptions

a. Occasional or Casual Sale

b. Sale-for-Resale

c. Manufacturing Property

d. Transactional Exemptions

e. Exempt Organizations

3. Bulk Sales

B. Gross Receipts Taxes

C. Corporate Income Taxes

1. In General

a. Jurisdiction to Tax

b. Business vs. Nonbusiness Income

c. Unitary Businesses

2. Other Income Tax Laws

a. Interstate Income Law

b. Multistate Tax Compact

D. Franchise (Capital Stock) Taxes

E. Real Property Taxes

1. Reassessment

2. Transfer Taxes

F. Unemployment Taxes

III. Mergers, Reorganizations and Property Transfers

IV. Stock Transactions

A. In General

B. Tax Planning

1. Buyer's Perspective

a. Representations and Warranties

b. Combined or Consolidated Reporting

c. Net Operating Loss Carryforwards

(1) Federal Provisions

(2) State Provisions

d. Deductibility of Interest

e. Elections Under § 338(g) and (h)(10)

(1) Federal Provisions

(2) State Provisions - Overview

(3) State Provisions - Specific

2. Seller's Perspective

a. Amount of Gain

b. Characterization of Gain

(1) State Law

(2) Federal Constitutional Limitations

(3) Planning Opportunities

c. Election Under Section 338(h)(10)

d. Loss Upon Sale

C. State Law

V. Asset Transactions

A. General

B. Tax Planning

1. Buyer's Perspective

a. Purchase Price Allocation

b. Successor Liability

c. Nexus and Apportionment

d. Investment Subsidiaries

e. Net Operating Loss Carryforwards

f. Sales and Use Tax Exemptions

g. Real Property

2. Seller's Perspective

a. Amount of Gain

b. Characterization of Gain

c. Apportionment of Business Income

C. State Law

1. Alabama

2. Alaska

3. Arizona

4. Arkansas

5. California

a. Sales and Use Taxes

(1) Sale for Resale

(2) Occasional Sales

(3) Bulk Sales

(4) Mergers, Reorganizations and Property Transfers

b. Property Taxes

c. Income Taxes

6. Colorado

7. Connecticut

8. Delaware

9. District of Columbia

10. Florida

11. Georgia

12. Hawaii

13. Idaho

14. Illinois

a. Sales and Use Taxes

b. Bulk Sales

c. Reorganizations

15. Indiana

16. Iowa

17. Kansas

18. Kentucky

19. Louisiana

20. Maine

21. Maryland

22. Massachusetts

23. Michigan

24. Minnesota

25. Mississippi

26. Missouri

27. Montana

28. Nebraska

29. Nevada

30. New Hampshire

31. New Jersey

a. Sales and Use Taxes

b. Income Taxes

32. New Mexico

33. New York

a. Sales and Use Taxes

(1) Manufacturing Equipment

(2) Sale for Resale

(3) Mergers, Reorganizations and Property Transfers

(4) Other Exemptions

(5) Bulk Sales

(a) Buyer's Obligations

(b) Seller's Obligations

b. Property Taxes

(1) Mortgage Recording Tax

(2) Real Estate Transfer Tax

(3) Real Property Transfer Gains Tax

34. North Carolina

35. North Dakota

36. Ohio

37. Oklahoma

38. Oregon

39. Pennsylvania

40. Rhode Island

41. South Carolina

42. South Dakota

43. Tennessee

44. Texas

45. Utah

46. Vermont

47. Virginia

48. Washington

49. West Virginia

50. Wisconsin

51. Wyoming

VI. International Considerations

Introductory Material

A. Worldwide Combined Reporting and the “Water's Edge”

B. Foreign Dividends and Deemed Dividends

C. Foreign Sales Corporations and Extraterritorial Income Exclusions


WORKING PAPERS

Working Papers

Table of Worksheets

Other Resources

Worksheet 1 Exchange of Information Agreements (Income Tax, Sales and Use Tax) (proposed by the Multistate Tax Commission)

Worksheet 2 Multistate Tax Compact (proposed by the Council of State Governments)

Worksheet 3 Uniform Division of Income for Tax Purposes Act (proposed by the National Conference of Commissioners on Uniform State Laws)

Worksheet 4 Multistate Tax Commission Allocation and Apportionment Regulations

Worksheet 5 Uniform Sales and Use Tax Certificate (proposed by the Multistate Tax Commission)

Worksheet 6 Model Recordkeeping and Retention Regulation

Worksheet 7 Stock Purchase Agreement

Worksheet 8 State Tax Acquisition Checklist

Bibliography

OFFICIAL

Statutes:

State Statutes:

Federal Statutes:

Treasury Rulings:

Cases:

UNOFFICIAL

Texts and Treatises:

Periodicals:

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