When businesses, whether as a seller or a purchaser are going through the acquisition process there is likely to be discussion as to whether the acquisition will be structured as an asset purchase or a stock purchase. There are advantages and disadvantages to a an asset purchase and a stock purchase to both the seller and purchaser however, there may be a means by which to treat a stock purchase as an asset purchase and receive the best of both worlds. The article below has been prepared by a Denver tax attorney and Denver business attorney to discuss certain matters, but please make sure to always discuss your specific issues with your attorney and check for current law and regulations that may have changed.
A stock purchase as a whole is relatively simple as the seller or target corporation’s stock is purchased and the buyer obtains control of the target corporation’s assets with no other action by virtue of owning all of the stock. This being said, the buyer may also inherit liabilities of the target corporation as the business continues and is exposed to prior matters. An asset purchase transaction may be more complex in that the buyer is purchasing the assets and not the stock thus requiring the transfer of title to each asset, which depending upon the facts and circumstances could begin to amount to significant time and cost etc. Further, if the target corporation has special licenses and permits, these may not be transferable to the buyer and could create additional issues under an asset purchase.
As there is good and bad with both structures, a buyer, from a tax perspective will generally prefer an asset purchase because the buyer after the asset purchase can step up the basis in the purchase assets. Therefore, the stepped-up basis in the assets will lead to larger depreciation to lessen taxable income and thus tax at the corporate or personal level. In comparison, when the stock is purchased, the buyer will receive a basis in the stock at the purchase amount and the realization of the tax benefit may not come until the buyer sells the stock using the basis in the stock to offset capital gain. Thus, it is likely the buyer will not “realize” the tax benefit of the stock purchase until a later date than they would under an asset purchase agreement.
There is a means under Internal Revenue Code Section 338 for the buyer to make an election treating a qualifying stock purchase as an asset purchase for federal income tax purposes. Under 338, if the transaction qualifies and the election is made, the transaction is treated as if the buyer purchased the target corporation’s assets for the purchase price of the stock. Therefore, the buyer will end up receiving the more advantageous step-up in basis of the assets.
Under IRC 338 a 338 election can be made (filing form 8023) on a qualifying purchase of 80% or more of the target corporation’s stock. The target and buyer corporations can be either C corporations or S corporations and it is highly recommended you consult with your tax advisors regarding the tax consequences as the election could potentially lead to unanticipated double taxation to the target corporation and shareholders. Under IRC 338(h)(10) a special election can be made for the qualifying purchase of a target corporation’s (C or S corporation) stock when the stock is owned by another corporation. The election cannot be made if individuals own the C corporation’s stock.
Making the 338 elections is a means by which to structure an acquisition as a stock sale, which certainly may have its benefits, but allow the buyer the tax advantage of an asset purchase agreement. This article has been prepared by John McGuire, a Denver tax attorney and Denver business attorney at The McGuire Law Firm. John can be reached at www.jmtaxlaw.com