Income Taxes: Mergers and Acquisitions (Portfolio 1240)

Bloomberg Tax Portfolio, Income Taxes: Mergers and Acquisitions, No. 1240, addresses the state income and franchise tax considerations that should be taken into account in planning corporate acquisitions. Tax planning for corporate acquisitions generally involves a primary emphasis on federal tax considerations. State and local tax considerations are often not addressed completely or are addressed too late in the process. Although all types of state and local taxation, e.g., sales and use taxes and property taxes, should be considered in planning corporate acquisitions, this Portfolio focuses on state and local income and franchise tax considerations.

Bloomberg Tax

This Portfolio is available with a subscription to Bloomberg Tax, a comprehensive research solution including over 500 Tax Management Portfolios™, practice tools, primary sources and timely news.

Description

Bloomberg Tax Portfolio, Income Taxes: Mergers and Acquisitions, No. 1240, addresses the state income and franchise tax considerations that should be taken into account in planning corporate acquisitions. Tax planning for corporate acquisitions generally involves a primary emphasis on federal tax considerations. State and local tax considerations are often not addressed completely or are addressed too late in the process. Although all types of state and local taxation, e.g., sales and use taxes and property taxes, should be considered in planning corporate acquisitions, this Portfolio focuses on state and local income and franchise tax considerations.

The state and local income and franchise tax consequences of a corporate acquisition can go beyond merely subjecting the buyer to tax on the income of the target from the state. Many states would require the buyer to file corporate franchise tax returns on which its worldwide income would be reported. The state's share would then be determined by applying an apportionment formula computed by using the buyer's worldwide property, payroll, and sales. This could result in a state tax liability substantially higher than the taxes that the target was previously paying on its operations in the state. Thus, the projected tax consequences of subjecting the buyer to tax in the jurisdictions in which the target does business should be determined when the transaction is structured. Finally, establishing a small location in a unitary state as a result of a poorly planned acquisition transaction, can often subject a post-acquisition corporate group into an unintended unitary filing.

Updates to the print and internet version of the portfolio will be incorporated directly into the Detailed Analysis.

Subscribers to the Internet version of the Portfolio will find late-breaking developments reported in the Bloomberg Tax Daily Tax Report - State.

This Portfolio may be cited as Faber, 1240 T.M., Income Taxes: Mergers and Acquisitions. Within the Multistate Tax Portfolio Series, however, references to the Portfolios will include only the Portfolio numbers and titles.

Authors

Peter L. Faber, Esq.

Mr. Faber is a partner in the New York City office of the law firm of McDermott, Will & Emery. He graduated from Swarthmore College with high honors and from Harvard Law School, cum laude.

He has served as Chairman of the American Bar Association Section of Taxation and is a member of the Section's Committees on Corporate Taxes (of which he is a past Chairman) and on State and Local Taxes. He is a former Chairman of the New York State Bar Association Tax Section.

Mr. Faber has lectured on state and local taxation at the Georgetown University Institute on State and Local Taxation, The Interstate Tax Conference, the National Tax Association, The NYU Annual Institute on State and Local Taxation, and before many other professional groups. He is the author of many articles on state and local taxation.

Table of Contents

Detailed Analysis
1240.01. INTRODUCTION
1240.02. GENERAL CONSIDERATIONS
A. Effect of an Acquisition on Jurisdiction to Tax
B. Effect of an Acquisition on Combined and Consolidated Reporting
C. Effect of Acquisition on Apportionment and Allocation of Income
1240.03. TAXABLE ACQUISITIONS
A. Treatment of the Seller
1. General Principles of Gain Recognition
2. Sale of Subsidiary Stock
a. Federal Tax Treatment
b. State Taxation of Gain or Loss
c. Apportionment or Allocation of Gains and Losses
d. Election Under I.R.C. § 338(h)(10)
e. State Conformity to Election Under I.R.C. § 338
(1)    Alabama
(2)    Alaska
(3)    Arizona
(4)    Arkansas
(5)    California
(6)    Colorado
(7)    Connecticut
(8)    Delaware
(9)    District of Columbia
(10)    Florida
(11)    Georgia
(12)    Hawaii
(13)    Idaho
(14)    Illinois
(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
(32)    New Mexico
(33)    New York
(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
f. Sale of Target Stock by Individual Shareholders
3. Sale of Assets by Target Corporation
a. Federal Tax Treatment
b. Recognition of Gain
c. Allocation of Sale Price
d. Distributions of Appreciated Property (I.R.C. § 311(b))
e. Liquidation of the Selling Corporation
f. Installment Sales
B. Treatment of the Buyer
1. The Basis of Acquired Assets and Allocation of Purchase Price
2. Deduction of Interest
a. Express Limitations
b. Limitations on Deducting Interest Attributable to Subsidiaries
c. Reclassification of Debt as Equity
C. Areas of Non-Conformity
1. Depreciation
2. Differences in Stock Basis at Federal, State Levels
1240.04. TAX–FREE REORGANIZATIONS
A. Qualification Requirements
B. Continuity of Proprietary Interest Test
C. Continuity of Business Enterprise Test
D. Other Qualification Requirements
1. Statutory Merger
2. Direct Acquisition
3. Assets for Stock
4. Other Types of Reorganizations
1240.05. NET OPERATING LOSS CARRYOVERS AND OTHER TAX ATTRIBUTES
A. Introduction
B. Federal Rules
C. State Rules Regarding Net Operating Loss Carryovers
1. General Rules Involving Net Operating Loss Carryovers and Carrybacks
2. State Rules Governing Net Operating Losses in Acquisitions
3. State Limitations on Net Operating Losses in Acquisitions
a. State Conformity to I.R.C. § 382
b. Application of State Apportionment Factors
c. Issues Created by Filing Methodologies or Consolidated Group Composition
d. Basis Differences Arising From State Depreciation Rules or Nonconformity to Federal Consolidated Return Regulations

Working Papers

Item Description Sheet
Worksheet 1 Sullivan & Paxton, “Planning for an Economic Upturn: IRC Section 382 Computational Approaches for Multistate Taxpayers,” 19 Multistate Tax Report 5 (May 25, 2012)