Mergers and Acquisitions

Chapter 9. Federal Income Taxation of Acquisitions^[1]

General

Overview

This chapter discusses U.S. federal income tax considerations related to corporate acquisitions, based on the Internal Revenue Code (IRC) of 1986 and subsequent significant changes.

Tax considerations often influence the structure of acquisitions, but they are secondary in importance to overriding business, legal, and economic considerations. However, even if compelling business, legal, or economic considerations are present, it is important to quantify the tax cost or tax savings of possible alternative structures. Major questions about the tax aspects of an acquisition include:

• Is the transaction taxable or nontaxable?

• In transactions that are taxable, how much of any realized gain or loss will be ordinary and how much will be capital gain or loss?

• To what extent will tax attributes, such as net operating loss and tax credit carryforwards, be usable against future taxable income?

The Code defines gross income as “all income from whatever source derived.” The Internal Revenue Service (IRS) and the tax courts generally start with this definition in considering the taxability of all transactions, including acquisitions. Acquisitions are taxable, nontaxable, or partially taxable. The taxability of a transaction is dependent on whether the transaction, or part of the transaction, meets the conditions of one or more of the specific tax‐free exceptions permitted by the Code. Failing to qualify for an exemption results in ...