Basic Tax Issues in Acquisition Transactions
By Michael L. Schler.
This article discusses basic U.S. tax issues that arise in an acquisition transaction. It is intended primarily for readers who are corporate lawyers rather than tax lawyers. The discussion is written in general terms and does not include every exception to the general rules (and exception to exception, and so on).
Most importantly, it is vital for the corporate lawyer to consult a tax lawyer at every stage of an acquisition transaction. The tax rules are detailed, often counterintuitive, and always changing. Details that are minor from a corporate point of view, such as which corporation survives a merger, can have vast consequences from a tax point of view. The particular structure of a transaction can mean that one party might achieve a significant tax benefit at the expense of the other party (e.g., your client), or even worse, both parties could end up significantly worse off than if a different corporate structure had been used. In addition, it is not enough merely to rely on the Internal Revenue Code and regulations, because there is a large body of Internal Revenue Service (“IRS”) rulings, judicial decisions, and nonstatutory doctrines.
It is also essential that the tax lawyer begin to participate in a transaction at the very beginning. This is usually when the basic structural elements of the transaction are determined. It is much easier to propose a particular structure at the time an initial term sheet is being negotiated than it is to propose a change in structure after both sides (with or without their respective tax lawyers) have agreed to it. Likewise, detailed ongoing participation by the tax lawyer is necessary to be sure that changes in documentation do not change the tax results that are important to the client.