Webinar Transcript: Tax Implications of Merger and Acquisition Transactions

Jonathan Shenkman

February 18, 2025

“Tax Implications of Merger and Acquisition Transactions”

Host: Jonathan I. Shenkman, President & Chief Investment Officer of ParkBridge Wealth Management (Contact: jonathan@parkbridgewealth.com)

Presenters: Avi Sinensky, Esq., Partner Rivkin Radler LLP (Contact: avi.sinensky@rivkin.com) and Louis Vlahos, Esq., Partner, Rivkin Radler, LLP (Contact: louis.vlahos@rivkin.com)

Jonathan Shenkman: Just give another 10-15 seconds to let people in, and then we'll get started.

Good morning, and welcome to the Park Bridge Wealth Management Winter Webinar Series. This program is entitled Tax Implications of Merger and Acquisition Transactions. As always, my name is Jonathan Shenkman. I'm the President, Chief Investment Officer of Park Bridge Wealth Management.

In that role I serve in a fiduciary capacity to help my clients achieve their financial objectives. The goal of my programs is to bring professionals together to help them better serve their clients. This is done by educating attendees on the latest topics in wealth planning, and by encouraging collaboration between a client's attorney, CPA, and financial advisor, where appropriate.

My practice focuses on working with high net worth families, businesses and not-for-profits. I manage individual investment portfolios, trust accounts, corporate retirement plans, and endowments to help my clients achieve their financial goals.

In addition to the 20 or so events I run every year, I also do a fair amount of writing on the topics of investing and financial planning. You can read my work in various periodicals, including Barron's, CNBC, Forbes, Kiplinger, the Wall Street Journal and Trust and Estates Magazine to name just a few. You can see all my work on my website at parkbridgewealth.com/articles, or by following me on social media at Jonathan on Money.

Additionally, you can check out my weekly podcast which is also called Jonathan on Money, and you can listen to that on Apple, Spotify or wherever you get your podcasts. Before I introduce our speakers, please pay close attention if you are an attorney or CPA in Connecticut, New Jersey, or New York, and are taking this program for credit. I'll be giving out a code during this program that you'll need to write down. There will be only one code."

It will be given at some point in the middle of the program. So have a pen and paper ready. After the program you will receive an evaluation form where you'll need to insert the code in order to receive credit. Please stick around until the end of the program for further instructions on receiving credit.

Today we're privileged to hear from Avi Sinenski and Louis Vlajos, both partners at Rifkin Radler, based in Uniondale, New York. Avi is a partner at Rifkin Radler's Corporate Practice Group with a broad-based transactional practice. He has extensive experience advising business owners and investors on a wide variety of corporate transactions and corporate governance matters across a broad range of industries and throughout all stages of the business cycle.

Lou is a partner at the firm where he practices tax law and has extensive experience in corporate, individual and partnership income taxation and estate and gift taxation, including tax planning, ruling requests, and tax controversy. He advises clients in connection with corporate organizations and reorganization, sales and acquisition of businesses and estate and succession planning, including the transfer of business interests and estate and gift tax audits, New York business tax issues, charitable giving tax exempt organizations, private foundations, and not-for-profit restructuring. He frequently writes about tax law as it applies to closely held businesses. Today Avi and Lou will be speaking on implications of merger and acquisition transactions, and with that introduction I will now turn the program over to Avi and Lou.

Avi Sinensky: Thank you, Jonathan. Always great to be back doing a webinar for Parkbridge. Great to see everyone. Good morning, and I'm extra happy to be here today with my tax partner, Lou Vlajos, because we're going to be talking about M and A transactions, and the best way to structure those in order to promote tax efficiency.

And you know, anytime I get engaged on a new M and A transaction almost as soon as I hang up the phone with the new client, my next call is immediately to Lou to say, "Okay, how are we gonna structure this thing? What's the best way to achieve the best tax result for our client?" And anytime a transaction is happening, tax is going to be one of the main primary driving forces in how a transaction is structured just because of the immense economic impact it can have on both parties.

So I'm excited to dive into this. Just to kind of lay out the agenda for the next hour or so, we are going to first provide what I would call a basic overview of different entity types and some basic transaction structures and provide an understanding of how those typical transactions are taxed for both a buyer and for a seller.

And then in the back half of the presentation, we are going to examine some alternative structures, some creative mechanisms that can be used to kind of bridge gaps in tax treatment between buyer or seller, or that are utilized in specific scenarios in order to achieve the best results when those standard typical transaction structures may not be the best options.

So to start out, probably a refresher for most people, but if not just to kind of lay out a reminder for those who are familiar or those are not - just because we will be mentioning these different types of entity structures throughout the presentation. And we just want to make sure everyone has fresh in their mind what we're talking about, and how these entities are taxed in general.

So, generally speaking, now obviously there's more nuance to this, and a lot of it depends on facts and circumstances. But we generally have 2 different types of tax treatment for different types of entities. Our general 5 types of entities that we see are S corporations, partnerships, both limited partnerships and general partnerships. Of course, the Limited liability company, and then what we call in tax language a disregarded entity which generally there, we're talking about a single member LLC or certain corporations owned by certain types of trusts.

All of those types of entities are eligible for what we call pass-through treatment, which means there's no tax assessed or paid at the entity level itself. The entity is essentially disregarded for lack of a better word for tax purposes, and all the profit and loss of the entity flows directly through to its owners, and is reported on their individual returns, based on their individual tax situation, given on based on their income, the state or city where they're located.

By contrast, we have the Chapter C Corporation. That's your typical corporation, your Walmarts, your Amazons. And then anyone who doesn't, who forms a corporation who doesn't elect for S Corporation treatment would be treated as a C Corporation, and the C Corporation, by contrast, is subject to what we call double taxation, in that the corporation itself pays corporate tax, and then, if and when the corporation makes distributions to its shareholders, the shareholders then pay tax themselves on the distributions that they receive.

Louis Vlahos: If I can interject there for a second after the 2017 act, with the reduction in the rates on C corporations, you know, from a top rate of 35 to a flat rate of 21, and again, depending upon the type of business we've seen a lot more C Corporations come across our desk than than we used to.

We've also seen a lot more interest in people looking to start off as Section 12.0.2 stock or corporations that qualify for 12.0.2 stock treatment. Again, when the rates were 35%, it wasn't a very attractive option for many folks, now that it's finally down to something that's more in line with the rest of the world, at least for now we're seeing a lot more interest in that.

Avi Sinensky: Yeah. And Lou mentioned the QSBS treatments under 12.0.2, which allows a C corporation stock that's originally issued to an owner to be eligible for significant tax savings upon sale. If you hold the stock for 5 years or more, and you know certain other requirements have to be met. So there's a huge advantage there. C Corporations are also extremely popular and common in the startup high growth world. Anyone looking to eventually raise venture capital money. And one of the reasons there is that if you're in growth mode, and not planning to either generate cash flow, or make distributions in the early years, the double taxation is not as scary, because double tax of 0 is still 0. If there's no profit, it doesn't matter how many times they tax you.

Okay? So that's kind of just a real intro, just to remind ourselves of the different entities that will be coming up and how they're treated. Of course, as we talk about them, we'll probably remind ourselves of this treatment. But just to lay out the land.

So now, when we jump into transaction structures themselves, if I am looking to buy or sell a business, and for our purposes, we are going to be focusing exclusively on private sales, which is why we're really going to be focusing on the first two items here. But we generally have 3 options, and you'll see option 3 kind of has 2 options within it. So option number one is, I can buy or sell the stock of the company. And this is typically what people think of when they buy a company. You know anyone who's like in the investment world, if you're buying something, it means you're buying the stock right? You're going on to a public market, and there's shares of Apple, there's shares of Walmart, and you are buying shares that are currently owned by one shareholder. And now you're going to become the new shareholder.

But the main alternative to what you can do to structure an M and A transaction is that instead, you can buy the assets of the company, and we'll see some illustrations as we go on the couple next pages in terms of how these actually look and work in practice. When I try to explain the differences of these two to clients, I like to often explain it in terms of soup. Yes, soup in a pot that cooks on your stove, and not just because we got the word stock in there, and it's a pun. But if you think about buying a stock in a company, you got a pot of soup, it's got all the good stuff in there. Let's say you got a hot piping chicken soup, and you got your chicken in there. You got your broth, you got your carrots, you got your parsnips. You got your zucchinis, and whatever else you may want to put in there. If I'm buying the stock, I'm basically just taking the pot. The entire pot that was yours. Now it's mine.

If I'm buying assets, think of it as the way that you can take a ladle right? An asset sale means you're using your ladle. It means you're going into the pot, and you're scooping out the parts of the soup that you want, and you're leaving behind the parts of the soup that you don't want, and you're taking that, and you're pouring it into your own pot.

When it comes to a merger - and again, these are very popular in public transactions and much less common in private company sales - you're basically smashing your soup together with the other person's soup and combining them into one. So basically, I have a soup, you have a soup, I'm going to either pour your soup into mine or you pour my soup into yours. And now it's all mixed together. Hopefully, it's the same type of soup. Hopefully they go well together. But that's essentially what you've done.

So those are our 3 basic transaction structures.

Louis Vlahos: Can I jump in there again? Avi, I'm sorry. Soups aside right? It is still possible to complete a merger without necessarily mixing the soups into one pot. Right? You can have a subsidiary beneath the acquiring corporation. It could be a newly formed corporation. It could be a single member LLC. Then you'll have the target company emerging into that entity. Okay.

Avi Sinensky: That's what what I was describing is actually what we normally refer to as a direct merger, where you kind of have 2 operating companies, and they merge directly into each other. And that's actually pretty rare for all sorts of reasons. But that's still the concept in terms of the you know you combine entities, and one disappears and the other one survives.

But as Lou is describing, what we instead usually see in a merger context is what we either call a forward triangular merger or a reverse triangular merger, and as you'll see in the pictures that we get to in a moment, the reason why it's called triangular is because of the inclusion of a subsidiary entity that forms a 3 entity triangle. But we'll get to those in a moment. So those are our 3 or 4 basic types of transactions: sale of stock, sale of assets or merger transactions.

And when we consider which type of transaction we're going to pursue on a given transaction, or which structure we're going to pursue, there are 4 main things that we want to think about as we approach each of them, because each of these can make material differences and material economic differences to our client. Number one is just the basic legal structure, and who the parties to the transaction are going to be when you sell stock.

The parties to the transaction are going to be the selling shareholders and the buyer, whether the buyer is individual buyers or an entity buyer. The, as we said, I own stock in the company. I want to sell that company to Lou. The parties to the transaction are going to be me and Lou. I'm selling stock. Lou is buying stock. Today I own the stock. Tomorrow Lou will own the stock.

When it comes to an asset sale, however, the parties to the transaction don't necessarily need to be, include me as the shareholder who owns the company. It usually may, for other reasons relating to non-compete obligations and representations and warranties. But for purposes of the meat of the transaction itself, the shareholders are not really a party to that.

Rather the main selling party there is the corporation, the target company itself. The target company is selling its assets to buyer. Again, whether that's an individual buyer - more commonly it'll be an entity buyer. So the real entities are the kind of like target. The current target and the new target are really the parties. It's more of an entity to entity transaction.

Louis Vlahos: Although, like obviously said there are going to be situations where the individuals, the owners are involved because they will have assets that they own personally or through a different entity outside of the operating business. Okay, it's usually real estate. But sometimes you'll find intellectual property that they've owned outside the company. The real estate is something that we see very often, certainly, among closely held businesses, because, you know, folks like to have that in their pocket even after the transaction where they've sold the assets of the operating business. It provides a nice annuity, and when you've got.

A PE firm that's the buyer, right? As opposed to someone of a more strategic nature. They're gonna want that location. They're not gonna try to consolidate the target with their own operations. So.

Avi Sinensky: Yeah, so the next thing and we could kind of almost talk about these together is the transferring of title to the assets of the target and the assumption of the liabilities of the target. So when it comes to selling stock...

What do you have to do to transfer title to assets or to cause the assumption of liabilities? The answer, generally speaking, is, you don't have to do anything because you're transferring the stock itself. So if we have a company, you know XYZ, Inc. and I own it, and I want to sell that to Lou, just by me transferring the stock to Lou, Lou now owns the assets and the liabilities, and everything that comes with it purely by operation of law. We have a vehicle that is titled to XYZ, Inc. We have a contract that's in the name of XYZ, Inc. Those stays right where they are. All that has changed is the ownership on top of that entity. Nothing else has to move below at the target level.

However, when it comes to an asset sale, that's not the case. Because, as we said, we're basically transferring the assets from, you know, current entity from the target to a new buyer entity, which means that we need to have some mechanism by which those vehicles, those contracts, employees, other assets, get legally transferred. Now that usually happens through a simple document or 2 called a bill of sale, or an assignment or assumption agreement. But the more important point is that, depending on the types of assets that you have, it may and often does, require 3rd party involvement to transfer those assets. For example, if you have equipment that is subject to lease, you may need to get the consent of the lessor to transfer that equipment. If you have contracts that require assignment, you're going to need to get consent from, you know. Most often the basic example is, you have a landlord who needs to consent to the transfer of the lease, but the same can be the case, for customer contracts. Vendor contracts, permits can often be...

A big sticking point in terms of having to get consent from a governmental entity to transfer those anytime you're dealing with asset sale. One of the first things that's important to do is to make sure you have a good understanding of if there's any roadblocks in the way of transferring those assets. Likewise.

When you buy stock by operation of law, you assume all of the liabilities of the target because you're just taking the target company by purchasing its stock. The liabilities were there yesterday. They're still in that entity today, and now they're yours by contrast. When you buy assets of a company other than several areas of law where there is a concept of successor liability like tax and employee benefits and environment which you always have to do extra diligence on to understand, but as a general rule of thumb you do not assume liabilities unless you explicitly agree to do so. So the lawsuit that occurred that's still pending that happened on seller's watch. You can leave that with seller, and it's their obligation to defend it and handle it if they sold product or provide services before closing, and someone comes out of the woodwork and brings a claim related to that.

You take the position. That was, that was a claim against XYZ, Inc. We bought the assets of that company in ABC LLC. And we have nothing to do with you. You know you get that thrown out of court in 2 min, usually.

So from a you know, corporate legal business standpoint, understanding how the assets and liabilities are going to be transferred, if at all is paramount in deciding which structure to pursue, and of course, last, and certainly not least, both for the transaction itself, and certainly for today's presentation is the different tax treatment that you're going to incur, based on whether you are buying or selling assets or liabilities and or merger.

And then, just to understand the merger standpoint. Actually, we'll do that when we get to the picture. So just to kind of illustrate what we've been talking about, maybe we should have done this sooner. But this kind of helps you visualize what we've been talking about. So here we have target shares. Kind of you meet target shares is the shareholder. Shareholder owns this target company target stays where it is. All that happens is target stock goes to acquirer, acquirer, sends money to owner of the target shares, and now target essentially will move underneath acquirer. After this transaction, in exchange for the money.

By contrast, when we deal with the sale of assets. We. We have these arrows in a different place. The selling shareholder target shares is not really relevant to the transaction itself. The transaction is happening between target and acquirer. So Target sends up, sends its assets over to the acquiring party, acquiring party sends money to target, and then usually what you would expect is target is going to distribute those funds up to its shareholders.

Usually almost immediately. But you know, depending on what target is, target might be an ongoing business that's going to continue operating and selling only a division. It may keep the money where it is, but, generally speaking, you're then going to see a distribution of funds up to the owners.

Louis Vlahos: It's also a question of if the payments have been made on a deferred basis or being made on a deferred basis, whether that's through a promissory note, or otherwise, so.

Avi Sinensky: Yep, very true. Okay. Now we have our mergers. So as we mentioned, here's your triangle form. This is why it's called a triangular merger. Our more common version is what we call the reverse triangular merger, and what happens is the acquiring company will form what we call a merger sub. It's not going to be a wholly owned subsidiary. Usually it's going to be an LLC. But it can be a corporation as well. The that merger sub LLC will then merge into target with the target as the surviving company.

So that after the merger occurs, you see our post merger diagram, the separate existence of merger sub goes away. All that we are left with is acquirer as the 100% owner of target.

By contrast, our forward triangular merger is essentially the opposite acquirer, sets up merger sub same way, but instead of merger sub going into target target, goes into merger sub and merger sub survives and merger sub. Now again target disappears. Merger sub is all that's left, except now. Merger sub acquires by operation of law all of the assets and the liabilities of the target.

And then, you know, for for all legal purposes, and we will mention stock tax treatment briefly, but for all legal purposes, a merger is essentially the same as a stock sale. In that you subsume all of the assets and liabilities automatically. You don't get to do the picking and choosing and and leaving behind liabilities, or leaving behind certain assets that you don't want. Everything comes along with it.

Louis Vlahos: Again that that's in the case of a okay reverse merger.

Okay? It's treated like a stock sale. It's usually used where we have some difficult shareholders on the target side who don't want to go along, and there's nothing in the shareholder agreement to compel them to go along like a drag along, so the importance of a shareholder agreement cannot be stressed enough.

Avi Sinensky: Yeah, yeah, as Louis said, the reason why in a in a and this is actually why it's often used in a public company context is that in order to do a stock sale, you, generally speaking, because every person owns their own stock, so in the absence of something that compels them. You can't force someone to sell their property, at least not yet. We'll see what happens.

The so what the what the merger statutes allow you to do is by majority vote or super majority vote, or with the consent of the Board of Directors depending on what your charter documents say, and depending on what jurisdiction you're in. The shareholders, by a certain threshold of vote, can compel the company to merge, which affectually accomplishes the same thing as a stock sale, but using a different form in a merger. Certain shareholders may have objection rights or dissenters rights and ways to get out of it, but the point is, you can still affect the transaction in a way that you wouldn't be able to accomplish a stock sale without those people's participation. So again, it's less common, the private company sale in public company. You have to do it because you know. Think about how many stockholders you would need to get on board to to sell a public company. If you needed everybody to sign a stock purchase agreement, it would be impossible.

Louis Vlahos: I mean, it's effectively a squeeze out, you know, because once a shareholder exercises those Dissenters rights their appraisal rights, they cease to be an equity owner. At that point they take on the status under State law as a debtor. I'm sorry as a creditor of the corporation. Okay? So the nice way of pushing people along.

Avi Sinensky: Okay. So those are our 3 types of transactions. We are really going to be focusing for the rest of the presentation, as I said, on the first two - sale of assets, sale of stock, because those are more common.

To the extent you're dealing with a merger for purposes of tax, a reverse triangular merger is going to be treated as a sale of stock, because that's essentially what it is. The stock is transferring from, you know, current owner to acquirer.

A forward triangular merger is treated as an asset sale for tax purposes, because the merger sub is the survivor, and it's really for tax purposes, viewed as an acquisition of the assets and the liabilities rather than the stock. So when we talk about sale of assets, sale of stock for tax purposes. Keep in mind that each of these types of mergers fall under one of those categories, even though we're really just talking about asset sales and stock sales.

So when we talk about tax, the key tax principle to keep in mind is that from a pure economic standpoint, the quicker that a buyer is able to recover its purchase price that directly leads to the deal becoming less expensive for them and more opportune for them, and one of the main ways that they can do that is through tax treatment which we will obviously get into some of the nitty gritty and details in a moment.

The main reason why, apart from tax that a buyer prefers to do an asset sale is because of the liability treatment, the ability to say that I'm starting fresh with a new company. All liabilities of the past are staying behind with the seller. I don't have to worry about something that might have gone wrong years ago. I don't have to worry that they have some, you know debt they didn't tell me about, or some litigation that's in the pike that's going to be their problem. I'm starting day one with a new company just with the assets, and you know, maybe certain liabilities that I've specifically agreed to take. But any unknown liabilities, any unassumed liabilities that they stay behind. Obviously a huge advantage from the seller's perspective seller, you know.

Again, apart from the tax treatment, they're happy to send all the liabilities away and not have to worry about them. So they obviously, from even just from a legal perspective, and not even from a tax perspective, prefer to do a stock sale if they can. But for purpose of this presentation this rule of thumb is going to be even more true for tax treatment. Buyers prefer to buy assets. Sellers prefer to sell stock, and we will, you know, we'll examine kind of different differences, and some of the ways that we can bridge those differences later in the presentation.

Jonathan Shenkman: I'm just gonna jump in here real quick. To give the code for those who are taking this program for credit. So if you're an accountant attorney who's taking this program for credit, please write this down. The code is A10 again, A as in Apple, the number one and the number 0 one final time, A10 back to you guys.

Avi Sinensky: Okay. Now we have our mergers. As we mentioned, here's your triangle form. This is why it's called a triangular merger. Our more common version is what we call the reverse triangular merger, and what happens is the acquiring company will form what we call a merger sub. It's not going to be a wholly owned subsidiary. Usually it's going to be an LLC. But it can be a corporation as well.

The merger sub LLC will then merge into target with the target as the surviving company, so that after the merger occurs, you see our post merger diagram, the separate existence of merger sub goes away. All that we are left with is acquirer as the 100% owner of target.

By contrast, our forward triangular merger is essentially the opposite - acquirer sets up merger sub same way, but instead of merger sub going into target, target goes into merger sub and merger sub survives. Now again target disappears. Merger sub is all that's left, except now merger sub acquires by operation of law all of the assets and the liabilities of the target.

And then, for for all legal purposes, and we will mention stock tax treatment briefly, but for all legal purposes, a merger is essentially the same as a stock sale in that you subsume all of the assets and liabilities automatically. You don't get to do the picking and choosing and leaving behind liabilities, or leaving behind certain assets that you don't want. Everything comes along with it.

Louis Vlahos: Again that that's in the case of a okay reverse merger. It's treated like a stock sale. It's usually used where we have some difficult shareholders on the target side who don't want to go along, and there's nothing in the shareholder agreement to compel them to go along like a drag along, so the importance of a shareholder agreement cannot be stressed enough.

The so what the merger statutes allow you to do is by majority vote or super majority vote, or with the consent of the Board of Directors depending on what your charter documents say, and depending on what jurisdiction you're in. The shareholders, by a certain threshold of vote, can compel the company to merge, which effectually accomplishes the same thing as a stock sale, but using a different form. In a merger, certain shareholders may have objection rights or dissenters rights and ways to get out of it, but the point is, you can still affect the transaction in a way that you wouldn't be able to accomplish a stock sale without those people's participation. So again, it's less common in private company sales. In public companies you have to do it because think about how many stockholders you would need to get on board to sell a public company. If you needed everybody to sign a stock purchase agreement, it would be impossible.

Louis Vlahos: I mean, it's effectively a squeeze out, you know, because once a shareholder exercises those Dissenters rights, their appraisal rights, they cease to be an equity owner. At that point they take on the status under State law as a creditor of the corporation. Okay? So the nice way of pushing people along.

Avi Sinensky: Okay. So those are our 3 types of transactions. We are really going to be focusing for the rest of the presentation, as I said on the first 2 sale of assets. Sale of stock, because those are more common.

To the extent you're dealing with a merger for purposes of tax, a a reverse triangular merger is going to be treated as a sale of stock, because that's essentially what it is. The stock is transferring from, you know, current owner to acquirer.

And one of the main ways that they can do that is through tax treatment which we will obviously get into some of the nitty gritty and details in a moment.

But our general rule of thumb, and this is both because of tax and also because of other reasons, is buyers prefer asset sales. Sellers prefer stock sales. We'll see why, with the tax in a moment. But just, you know, thinking back to what we talked about earlier, the main reason why, apart from tax that a buyer prefers to do an asset sale is because of the liability treatment, the ability to say that I'm starting fresh with a new company. All liabilities of the past are staying behind with the seller. I don't have to worry about something that might have gone wrong years ago. I don't have to worry that they have some, you know debt they didn't. They didn't tell me about, or some litigation that's in the pike that's going to be their problem. I'm starting day one with a new company just with the assets, and you know, maybe certain liabilities that I've specifically agreed to take. But any unknown liabilities, any unassumed liabilities that they stay behind. Obviously a huge advantage from the seller's perspective seller, you know.

Avi Sinensky: Okay.

Louis Vlahos: If I've been there again just for a second. I keep interrupting. I'm sorry on the asset sale. We're assuming here that we've got unrelated parties. Okay, it's an arm's length transaction. Fair market value is being paid.

Often encounter situations where folks try to argue. Well, there is de facto merger here and you push them on that. How is it de facto merger? We've got different parties on both sides, meaning different owners with arm's length transaction, fair market value purchase price.

No need to be concerned that you're still going to as an asset buyer be hit with the income tax liabilities of that of that target.

You may be responsible for the sales taxes associated with that business that have not been paid. So just something to be aware of.

Avi Sinensky: Yeah.

Alright. So, Lou, why don't you give us kind of the the high level overview on on stock sales? And and how those impact both parties.

Louis Vlahos: My levels are good. Although when you fall, it's that much worse. Okay, sales, Doc...

99.99% of the times are. Our seller of stock holds it as a capital asset. Okay, they're not a dealer that we're dealing with. So when they dispose of the stock, and again assuming that they've held it for more than a year, so that it's treated as a long term capital asset in their hands. They're going to get preferred treatment on the Federal side. Okay. Whatever gain they recognize is going to be taxed at a 20% federal rate. Okay, just to stick in some state and city things here, state and city do not distinguish between capital gain and ordinary income. Okay.

The amount of gain is an interesting point, because it's going to vary from shareholder to shareholder very much dependent upon when and how that shareholder acquired their shares.

So you're going to have situations where, especially in the closely held, where shareholders are comparing notes. And you've got some people who are going to be paying a boatload of tax because they were the founders and others who may receive it as compensation, you know, under Section 83 others who inherited those lucky bastards. I'm sorry. Did I say that aloud, those lucky folks who who inherit from a decedent and have a stepped up basis, preferably closer to the sale than not.

So you're going to have very different economics here, and that can play out in the relationships here. It sounds silly, but it actually happens. So another distinction. And this depends upon whether you've got an S Corp or a C Corp.

Anytime an individual - and we're assuming individuals trusts, partnership types here, at least on C Corp side - anytime one of them sells stock in a C corporation...

If they're not materially - I'm sorry in the S corporation - if they're not materially participating in that S corporation's activities. They're going to get hit with the 3.8% surtax on that investment income.

If they are materially participating. Okay, they will not be hit with that stock with that investment tax. Okay, another distinction between the shareholders within a single corporation, all right. On the C Corp side. You don't have the problem, regardless of how active the shareholder may be when they dispose of their stock taxable event. They're going to be hit with that 3.8% surtax on the capital gains. So you're not looking at really 20%. It's a given. It'll be 23.8%. All right again something that you have to consider when you're running it through the economics here, which everyone should be doing in advance of signing a letter of intent. Frankly, once you've got a purpose Price agreed to, you should have some sense of of what the consequences are going to be. Yes, there's a lot of negotiation, and things are ironed out as you go along. But you want to know in advance ballpark what your net economic result is going to be, because trying to change the deal. Midstream is extremely difficult. Okay?

What else do we have here on the list here?

Avi Sinensky: Just to kind of like, you know, sum up the base, the basic treatment. So when you sell your stock again. This is, you know. Think of it what you know. You own stock in a public market. It's it's really the same concept. Your your tax incurrence is going to be equal to...

Long term capital gains rate apply to your gain, which is going to be calculated as the amount of money you receive, generally speaking, less, the amount of money you paid. I mean, that's generally going to be your basis. There's obviously different ways that basis can change, depending on how creative your accountants are. But that's a general rule of thumb. How much money did I pay for the stock? How much money did I get for selling the stock. The difference between those is my gain, and then I pay 20% on on that amount. Assuming that I held the stock for more than one year, and I'm eligible for long term capital gains.

By contrast, and we'll see kind of the difference in a moment, the buyer has no ability to use the tax code in any way to recover its investment until it sells the stock. The buyer, when it sells the stock it gets obviously presumably gets money from from its secondary buyer. But there's nothing to do to do in the interim, and, as Lou said, it's very important for the seller perspective to keep in mind that because of the different holding periods because of different bases every individual stockholder might be in a different position, and then, of course, they might be in a different jurisdiction. So all of that is going to impact their ultimate tax treatment.

As Lou said, C Corporations are, you know on the downside. They can be subject in the scenarios that he described to the additional 3.8%. But on the bright side they can be eligible for the tremendous benefits. Where, what is it you get to? You get to deduct what the first...

15 million of gain.

Louis Vlahos: On the 12.0.2, 10 million.

Avi Sinensky: So first, yeah, so there's ways. If you qualify, the first 10 million dollars of gain gets disregarded, and you only pay tax in excess of that. So it's a real beneficial structure. If you if you start out as a C Corp and hold the stock for more than 5 years to really achieve a tremendous tax result.

Louis Vlahos: Again, original issuance, and all the requirements are met. Yes.

Avi Sinensky: Yeah. And while you know, we, we mentioned that in a in a stock transaction, the the target itself is typically not going to be a party to the transaction.

The type of entity depending on history. There can be consequences to the target itself. Lou, I'll let you speak to those briefly.

Louis Vlahos: Oh, yeah, if your target is an S corporation, I mean, you're going to be losing the S corporation status the election. If you've got a C corporation buyer, for example, or you have a non-resident alien who is the purchaser. Although there has been talk in Congress practically every year for a few decades. Now to change that, to allow non-resident aliens to acquire stock in an S Corp. But it hasn't gone very far.

The other thing here is with net operating losses. You know, C corps can carry those forward now. Indefinitely. But there are limitations.

Putting the 2017 act aside. The limitation that we're talking about here is when you have a change in ownership of the corporation, as we will in this case, we're talking about a 100% change in ownership here. So the ability of that owner through the C corporation to continue using those losses is going to be restricted. It's based on the fair market value at the time of acquisition. And what's referred to as a tax exempt rate that the Service publishes every month. Okay, it's published in a revenue ruling usually the 3rd week of the month.

But that sets the cap. The amount that you can deduct in any year going forward. All right. So you may think you're getting all these losses. Yeah, you are. But they're going to be subject to to at least that restriction and a couple of others on a going forward basis.

Avi Sinensky: Yeah. So those are our 3 types of transactions. We are really going to be focusing for the rest of the presentation. As I said on the 1st 2 sale of assets. Sale of stock, because those are more common.

To the extent you're dealing with a merger for purposes of tax. A a reverse triangular merger is going to be treated as a sale of stock, because that's essentially what it is. The the stock is transferring from, you know, current owner to acquirer.

And one of the main ways that they can do that is through tax treatment, which we will obviously get into some of the nitty gritty and details in a moment. But our general rule of thumb, and this is both because of tax and also because of other reasons, is buyers prefer asset sales. Sellers prefer stock sales. We'll see why, with the tax in a moment. But just, you know, thinking back to what we talked about earlier.

The main reason why, apart from tax that a buyer prefers to do an asset sale is because of the liability treatment, the ability to say that I'm starting fresh with a new company. All liabilities of the past are staying behind with the seller. I don't have to worry about something that might have gone wrong years ago. I don't have to worry that they have some debt they didn't tell me about, or some litigation that's in the pike that's going to be their problem. I'm starting day one with a new company just with the assets, and you know, maybe certain liabilities that I've specifically agreed to take. But any unknown liabilities, any unassumed liabilities that they stay behind. Obviously a huge advantage from the seller's perspective seller, you know.

Again, apart from the tax treatment, they're happy to send all the liabilities away and not have to worry about them. So they obviously, from even just from a legal perspective, and not even from a tax perspective, prefer to do a stock sale if they can. But for purpose of this presentation this rule of thumb is going to be even more true for for tax treatment. Buyers prefer to buy assets. Sellers prefer to sell stock, and we will, you know, we'll examine kind of different differences, and some of the ways that we can bridge those differences later in the presentation.

Avi Sinensky: Okay.

No need to be concerned that you're still going to as an asset buyer be hit with the income tax liabilities of that target.

The one exception is on the sales tax on New York. And though we're focusing on the Federal tax contact much as here, there is a bulk sales problem in New York that if you acquire the assets and you don't get clearance from the Department of Taxation before doing so, you may be responsible for the sales taxes associated with that business that have not been paid. So just something to be aware of.

Avi Sinensky: Yeah.

Alright. So, Lou, why don't you give us kind of the high level overview on stock sales? And how those impact both parties.

Louis Vlahos: My levels are good. Although when you fall, it's that much worse. Okay, sales, Doc...

99.99% of the times are our seller of stock holds it as a capital asset. Okay, they're not a dealer that we're dealing with. So when they dispose of the stock, and again assuming that they've held it for more than a year, so that it's treated as a long term capital asset in their hands. They're going to get preferred treatment on the Federal side. Okay. Whatever gain they recognize is going to be taxed at a 20% federal rate. Okay, just to stick in some state and city things here, state and city do not distinguish between capital gain and ordinary income. Okay.

The amount of gain is an interesting point, because it's going to vary from shareholder to shareholder very much dependent upon when and how that shareholder acquired their shares.

Louis Vlahos: If they're not materially - I'm sorry in the S corporation - if they're not materially participating in that S corporation's activities. They're going to get hit with the 3.8% surtax on that investment income.

On the capital gains. So you're not looking at really 20%. It's a given. It'll be 23.8%. All right again something that you have to consider when you're running it through the economics here, which everyone should be doing in advance of signing a letter of intent. Frankly, once you've got a purpose Price agreed to, you should have some sense of of what the consequences are going to be. Yes, there's a lot of negotiation, and things are ironed out as you go along. But you want to know in advance ballpark what your net economic result is going to be, because trying to change the deal. Midstream is extremely difficult. Okay?

What else do we have here on the list here?

So you're going to very different economics here, and that can play out in the relationships here. It sounds silly, but it actually happens.

So another distinction. And this depends upon whether you've got an S Corp or a C Corp. Anytime an individual - and we're assuming individuals trusts, partnership types here, at least on C Corp side - anytime one of them sells stock in a C corporation...

Louis Vlahos: If they're not materially - I'm sorry in the S corporation - if they're not materially participating in that S corporation's activities. They're going to get hit with the 3.8% surtax on that investment income.

What else do we have here on the list here?

Long term capital gains rate apply to your gain, which is going to be calculated as the amount of money you receive, generally speaking, less, the amount of money you paid. I mean, that's generally going to be your basis. There's obviously different ways that basis can change, depending on how creative your accountants are. But that's a general rule of thumb. How much money did I pay for the stock? How much money did I get for selling the stock. The difference between those is my gain, and then I pay 20% on that amount. Assuming that I held the stock for more than one year, and I'm eligible for long term capital gains.

By contrast, and we'll see kind of the difference in a moment, the buyer has no ability to use the tax code in any way to recover its investment until it sells the stock. The buyer, when it sells the stock it gets obviously presumably gets money from from its secondary buyer. But there's nothing to do in the interim, and, as Lou said, it's very important for the seller perspective to keep in mind that because of the different holding periods because of different bases every individual stockholder might be in a different position, and then, of course, they might be in a different jurisdiction. So all of that is going to impact their ultimate tax treatment.

As Lou said, C Corporations are on the downside - they can be subject in the scenarios that he described to the additional 3.8%. But on the bright side they can be eligible for the tremendous benefits. Where, what is it you get to? You get to deduct what the first...

15 million of gain.

Louis Vlahos: On the 12.0.2, 10 million.

Avi Sinensky: So first, yeah, so there's ways. If you qualify, the first 10 million dollars of gain gets disregarded, and you only pay tax in excess of that. So it's a real beneficial structure if you start out as a C Corp and hold the stock for more than 5 years to really achieve a tremendous tax result.

Louis Vlahos: Again, original issuance, and all the requirements are met. Yes.

Avi Sinensky: Yeah. And while we mentioned that in a stock transaction, the target itself is typically not going to be a party to the transaction, the type of entity depending on history, there can be consequences to the target itself. Lou, I'll let you speak to those briefly.

Louis Vlahos: Oh, yeah, if your target is an S corporation, you're going to be losing the S corporation status election if you've got a C corporation buyer, for example, or you have a non-resident alien who is the purchaser. Although there has been talk in Congress practically every year for a few decades now to change that, to allow non-resident aliens to acquire stock in an S Corp. But it hasn't gone very far.

The other thing here is with net operating losses. You know, C corps can carry those forward now indefinitely. But there are limitations.

Putting the 2017 act aside. The limitation that we're talking about here is when you have a change in ownership of the corporation, as we will in this case, we're talking about a 100% change in ownership here. So the ability of that owner through the C corporation to continue using those losses is going to be restricted. It's based on the fair market value at the time of acquisition and what's referred to as a tax exempt rate that the Service publishes every month. It's published in a revenue ruling usually the 3rd week of the month.

But that sets the cap - the amount that you can deduct in any year going forward. So you may think you're getting all these losses. Yeah, you are. But they're going to be subject to at least that restriction and a couple of others on a going forward basis.

One other parentheses here for the involvement of the corporation, and it's something that you'll use where the corporation has a lot of extra cash laying around where it may become involved in the transaction itself by using that cash to redeem stock at the same time that the buyer is purchasing the other stock. Okay? So between the corporation which is being acquired by the buyer and the buyer themselves, they can complete the stock transaction. It saves the buyer some money, if you will, because they're using the excess cash sitting in the corporation to complete the redemption, at least in part. So again, it's something to keep in mind when you're looking at the balance sheets here - something in excess of working capital that you need in the company.

That's a good function for it there.

Avi Sinensky: Okay. So that's that. That's our general rule of thumb on stock sales. Seller gets capital gains treatment on their gain buyer holds the stock, and doesn't recover any investment until they sell it.

Louis Vlahos: I mean just one more pointer, I mean, just comparing to sales by partnerships. And we're not talking about partnerships here today. But when a partner sells its interest in the partnership, you have to look at the underlying assets of the partnership to see how many of them, if they were sold directly would generate ordinary income or the so-called hot assets.

To the extent that the value, the amount of the purchase price is attributable to such assets the character of the gain is going to change in the hands of the selling partner. Okay, it'll be treated as ordinary income to the extent of the value attributable to those hot assets.

S Corporations are passed through right, but we do not look through for that purpose. We do for other purposes like basis step up. We consider that in that instance - do we have hot assets there. But when you're talking about a sale of business like this, no. So selling the stock goes beyond just the convenience of it. It's the nature of the game that's underlying the entity there. That's also significant.

Avi Sinensky: Absolutely okay, asset sales. And here's the real magic for the buyer. Yeah, buyers from a tax perspective always want to buy assets. The buyer...

Can, during the course of its ownership of the assets in its new entity, has the ability to depreciate or amortize certain types of its assets, and then essentially use that to deduct and offset its income generated from the assets over the life that it owns those assets, and it can start doing that immediately. And, you know, depending on the types of assets, there's a different depreciation or amortization schedule, whether it's 5 years, 10 years, 15 years or more, but almost immediately it can start offsetting its gains by depreciating or advertising those assets. And that's the big advantage from a buyer's perspective. In addition to the step up of basis which allows it to have a lower gain when it ultimately disposes of the assets, is a real advantage for the buyer.

The seller, by contrast, is almost never going to get pure capital gains treatment on an asset sale. It's possible depending on the types of assets, and we'll talk about that quickly. But basically, the way it works on an asset sale is, you have your purchase price, which is the amount that the buyer is going to be taxed at and purchase price is going to be calculated. Obviously the amount of money or other property that you receive as part of your purchase price. But, importantly, the value of the assets that are of the sorry. The value of the liabilities that are being assumed by the buyer is also calculated as part of the purchase price, because those are. That's value that the buyer is is giving to the seller by taking over those liabilities.

And when you buy assets, what you have to do is what is called an allocation of purchase price, and this requires to have a good tax lawyer or good accountant to make sure they understand all the different types of assets, because different assets are taxed at different rates when they are transferred. You have your capital assets, such as intangibles, goodwill. What else falls into this category?

Louis Vlahos: Well, the rest of them. If you have some investment assets on hand that really may be part of working capital. But aside from that that's the extent of your capital assets. The rest of them yield capital gain. Okay? 1231 assets basically depreciable property that you're using in the trade or business which could be, you know, machinery and such. It could be real estate that's used in the business. Those will get you capital gain treatment, assuming there's gain on the gain on their disposition.

Avi Sinensky: Yeah. So again, depending on the type of assets that you know. And it's again, because you're selling assets. You're not selling stock. It's almost viewed for tax purposes. As each individual asset is being sold, and each individual asset is taxed on the gain, on that asset at the applicable rate that applies on a sale of that type of asset.

So if it's an asset that qualifies for capital gains treatment, that the gain on that asset is taxed at the long term capital gain rate of 20%. If it's an asset such as accounts receivable inventory or other depreciable assets or other ordinary income assets. Those are going to be taxed at the much higher ordinary income rate, which, if you're in the highest tax bracket, which, if you're selling a business, then, presumably in that year you will. You will be those assets will be taxed at 37%, which typically results in a blended rate of somewhere between 20 and 37%, depending on how much of the purchase price is being allocated to capital assets versus how many are being allocated to the non capital assets.

And there's always a point of the transaction where there is some tension here between buyer and seller, because Seller wants to obviously allocate as many of the assets as they can, or at least that they can justify to the bucket of capital assets, which means that they often will want to allocate as much as possible to what we call goodwill, which is one of those things that is hard to define for some people. But it's essentially the brand, and the name of the company, and its goodwill in the marketplace, and depending on the type of business that often is all that you're buying. I mean, think about like, you know, you're buying a professional services business. It doesn't really have much in the way of real assets as you think of it. Its assets are its relationships with its customers, its reputation in the marketplace.

So in those types of assets and those types of asset sales, you often can get very close to a long term capital gain treatment because the vast majority of the assets fall into that intangible bucket. You're not selling machinery and inventory, and you know real hard physical, tangible things.

Important to note for both tax, both asset sales and for stock sales that they can be eligible for installment sale treatment. If part of the part of the consideration is going to be paid at least a year following closing, whether that's as part of a note, or an escrow, or...

Louis Vlahos: It's different tax. Now, yeah.

Avi Sinensky: There's, you know, there are rules to comply with that, to make sure that you qualify for that so obviously very important to understand and navigate those rules. But general rule of thumb in taxes you don't pay tax until you receive the money, and buyer doesn't get to deduct the payments until it pays the money.

Louis Vlahos: Yeah, there, there are exceptions. If I can jump in here, please. Avi, we're talking about here, either a partnership, really. But an S Corporation in this context, because that's where you have individual shareholders or people who are treated as individual shareholders for tax purposes, and they have the distinction and the rates that apply to them.

Okay, if you're talking about a C Corp, there's a single rate that applies regardless of the nature of the assets being sold. Okay, it may matter in a C Corp if you've got capital loss carry forwards. That's a different story. Okay? Because then that can be used against capital losses. Capital gains rather forgive me against capital gains. Okay, you got a 5 year carry forward, and that, assuming you have anything left from your 3 year carry back. But in that case it'll matter to a C-corp. Aside from that, not really okay. On the installment sale again.

This matters to both types of entities. S Corp and C Corp. Depending upon the asset being sold, certain assets do not qualify for installment reporting all right, so things that would generate ordinary income. For example, the big thing that we always encounter are 1245 assets meaning depreciation recapture assets.

It's non real estate assets that you have depreciated, and you're recapturing the amount of that depreciation as ordinary income. It's a timing thing you get the deduction upfront, but on the back end, you recover its ordinary income to the extent you can keep your allocation to those types of assets, to the remaining book value to the remaining basis.

You don't have to worry about it, but then you've got the tension between the buyer and the seller there, where the buyer knows they can recover their purchase price much faster on that type of an asset. Okay, not just through depreciation, but at least for another year, 2 years. Actually, you have the ability to expense the cost incurred in acquiring certain assets. Okay, there's bonus depreciation.

Once upon a time is limited only to new acquisitions, to new assets that you're placing in service for the first time, but was extended to cover used assets, if you will like here, where you're buying from a business. Okay, that's been phasing out after 22. So right now, I think you get to write off 40% this year of your cost for that type of an asset. Next year it's 20%, and then it goes away. But I think both parties in Congress are in favor of extending that benefit.

Was there anything else on that slide that I did not touch upon? Avi, that you may want to know about here?

Avi Sinensky: No, I think we got it. Okay, yeah, with the with the remaining time we have left, which, unfortunately, is less time than we had hoped. We're gonna quickly run through some alternative transaction structures.

That can be utilized to create tax efficiency or to to harmonize buyer and seller positions. So there are scenarios where, for either business or practical reasons, utilizing a pure stock sale or a pure asset sale doesn't work.

Most common is where buyer wants to still buy the assets because of the tax reasons, but there are they have to buy the stock for other reasons. Most common scenario is, you know, we talked earlier about you have all these contracts or permits that you have to get consent to assign, and either a maybe there's just such a huge number of contracts that the process of going to get all those consents is just going to be impractical, or, as a matter of reality. Certain contracts, certain permits, are just not assignable. I've definitely dealt with permits in like heavily regulated areas where the Government will just. They do not allow that permit to be transferred. The buyer would have to apply for their own permit if they wanted to buy the assets, and sometimes that could take years to get, so that will leave them with no alternative other than to just buy the stock so that they step into the shoes of the seller, and and have access to that current permit which is registered in the name of the seller entity.

Also, for other reasons, you know, they may want to maintain the EIN of a of the seller. You know, kind of similar scenario where the EIN is recorded as being tied to a certain part, permit a certain contract, and there's no way to change that and then, finally, these can also be used as a way to bridge the gap between buyer and seller, because, let's say, the seller is insisting on capital gains. The buyer wants to buy the assets to get its tax results, and other than just increasing purchase price. There's really no way to accomplish that through your traditional methods.

So the 3 alternatives that we're going to quickly run through are those provided under codes 3, 38, h, 1336 e, and 3, 68, a 1 f, yeah. Because I couldn't make this one simpler. And that's colloquially known as the F reorganization.

So the first one to passed into law was section 3, 38 h. 10, and the most. This is a not always, but typically used when we're dealing with a target S corporation. And this is a joint election made by both the buyer and the seller as part of the transaction documents where they're both agreeing that, notwithstanding that for all other purposes, legal and otherwise, we are treating this as a sale of stock.

For tax purposes. We're going to treat this as a sale of assets, and buyer and seller will participate in a fiction that we are doing an asset sale, even though on paper everything else looks like a stock sale, and it will be treated as a sale and a purchase of assets only for tax purposes.

Now, Lou, if you want to run through some of the requirements to be eligible.

Louis Vlahos: Yeah, you know, to to save time, they actually combine H 10 and E here together like. Obviously at H, 10 has been around for for some time. It applies where you have an S corporation target. So you've got individual shareholders, let's say, or we have a Consolidated Group, or an affiliated group or C corps, where you're buying from a parent C corporation. Most of what we see is on the s corporation side.

You buy the stock. It's treated as if the target company sold its assets in exchange for whatever the consideration was, plus the liabilities. Okay? Because we're treating it like a real asset sale, and you look at the Regs on the 3, 38, 10, and they tell you, pretend this is a real asset sale. If you had to interpret some ambiguity in the regulation so.

Avi Sinensky: Like when when you're dealing with a tax lawyer on one of these, they will keep referring it to as an asset sale, and it'll drive you crazy.

Louis Vlahos: Oh, no, I'm pretty good about that.

Avi Sinensky: Keep calling it an asset cell, and you'll say no. It's.

Louis Vlahos: Fine, fine, fine, fine.

Avi Sinensky: They only talk in tax.

Louis Vlahos: Anyway. The point here is that you have to consider also the liabilities because they're deemed to have been assumed or taken subject to, notwithstanding that you're actually acquiring the stock of the corporation. Okay? So that's added into the consideration much as it would be in an asset sale where you're assuming we're taking subject to liabilities around those assets right? And after that the target is deemed to have liquidated. That's how the fiction works to get the consideration up into the hands of the shareholders who really sold their stock as a matter of State law. As a matter of contract. Okay, you may have gained on the sale of that stock, on the liquidation of that stock. But 1st step 1st.

Depending upon the nature of the assets, the gain flowing through. We're assuming an S Corp. The gain flowing through may be ordinary. It may be capital that's added to your stock basis. Okay, your deemed investment in your stock when the distribution then is made, and again, this will depend upon where your starting basis was as a shareholder. When the distribution is made in liquidation in the deemed liquidation. You may have additional gain there as a shareholder that you'd have to pick up.

One thing that that we will often do, and Avi mentioned it there at the bottom. That gross up language we'll try to determine. How much would you have received you, the seller net of tax if you had sold your shares.

And now, how much are you going to get by accommodating the buyer here and agreeing to make the H 10 election, and we went through that, and we determined a gross up amount that the buyer would have to pay to get the shareholders who are selling their stock the same economics as they would have had on a straight stock sale, and it has been rare in my experience for the buyer to push back on that.

Oh, the allocation of that additional.

Avi Sinensky: Win-win.

Louis Vlahos: The gross up is going to be allocated to goodwill, more likely than not. So they're going to recover it, albeit over a longer period. The goodwill is 15 years right off. Okay?

But again, it's a joint election, so the buyer has to get the seller to go along. The buyer cannot. They're not going to get their election again. The importance of the letter of intent. This is not something you need at the end of the day something that should be discussed upfront. You're not going to start off the marriage. Very well. If this is something that you introduced on the night of the closing.

Okay, 3, 36 e. Whereas on the h, 10 side, we have to have a corporate buyer, single corporate buyer acquires again the 80%. But, practically speaking, here, we're talking about acquiring 100.

Technically, it's over 12 months. We're going to do it in one day on the East side. This thing came in about 30 years ago. More than that, actually, now, 30, 40 years ago, we didn't get regulation until about 3 decades later, and it pretty much parrots. What you see on the H. 10 side. Again, a deemed sale of assets.

Followed by a liquidation of the target corporation up into the shareholders. Okay, so much pretty much the same same type of target. It's either an S corporation or an 80%. C corporation, 8% owned by at least 80% by a corporate parent or part of a consolidated group. The difference is the nature of the buyer.

You can have multiple buyers. Okay, you can have a partnership as a buyer, you can have individuals as buyers. So it's a very different set than you found in the H. 10 side not sure why it took them so long to figure out them being Congress. Why, it took them so long to figure out that this is something that non-corporate buyers would also benefit from, because they face the same hurdles as would a corporate buyer. Where you've got...

So many assets are difficult to transfer assets. Let's try to accommodate. Let's try to reconcile those two goals of the buyer and the seller.

In both situations the stock sales ignored. Okay, there's no gain generated from that. The gain is on the Dean liquidation, and of course the pass through on the S. Corp. Side, if that's what we're talking about installment reporting is possible. Okay, there are rules under the 453 reg the installment Regs for for installment reporting. I think it's the dash 11 regs. Where, with an S Corporation at least.

If the liquidation occurs within 12 months after the adoption of a plan of liquidation, the S Corp can distribute an installment note up to its shareholders without accelerating the gain associated with that C Corp. Can't do that. It will accelerate the gain that's otherwise being deferred, as Avi explained earlier on the installment note, right where you don't get taxed. You don't recognize the gain until you actually receive something.

What else do we have there? Avi.

Avi Sinensky: And yeah, that's.

Louis Vlahos: The F reorg the F reorg is a wonderful thing, especially if you're dealing with a private equity firm that wants you to roll over part of your equity.

Step back a second private equity firm buys your stock. Let's say it qualifies to make an H 10 election, or to make a 3, 36 E Election.

I should add, by the way, that the election the buyer is not involved. Okay, it's something. Yeah, something that's done on the seller side. So again, if you're preparing documents, you want to make sure from the letter of intent stage that the seller is going to agree that they're going to make the election, or if you don't want them to make it as a buyer, you make sure that they're not going to make it, because again, it's something that's done strictly on the seller side.

You want to be careful of where you're going. You want to know where you're going to end up in advance, all right.

But let's say, in each of those situations you can't cherry pick what's being transferred over right? You have gained. You're deemed to have sold all your assets, not just part of them. So the idea of being able to defer part of the gain by rolling over a piece of it...

Into the PE firm. Okay, or any other firm that may be interested in, you know, having you keep some skin in the game on a pre-tax basis, which is clearly what the selling shareholders would prefer.

Along comes the every organization that's been part of the code for a very, very long time, but has seen a resurgence once the PE firms started buying up everything under the sun from your dental practices to your whatever else you want to think of there.

Anyway, that's what they do, what they do.

Avi Sinensky: Is. Really, it's really the best of the bunch.

Louis Vlahos: Yeah, very much. Is.

Avi Sinensky: Most advantages. Everyone really gets to have their cake and eat it too. The buyer gets to get their asset sale treatment. The seller gets their stock sale treatment, and, as Lou said, it also facilitates the ability to do a rollover which is increasingly common, especially in the private equity context, they don't want to. They're not going to pay pure cash. They always almost always want the seller to roll over 10 to 20% of their consideration...

Into the buyer entity or into a holding company. So that way they're motivated to keep growing. The company, also, because private equity firms or other entity buyers are not permitted under the tax law to be S corporation shareholders. It also obviates that problem as we'll as we'll see, I'm going to just quickly run through how an F reorganization is mechanically accomplished in the next slides, and we'll try to limit that to 2 min and end this. And it's very important, as many of us have learned some recent transactions. To do this very carefully and timing wise. There's a very specific way. This has to follow, and if you do it incorrectly, you can blow the whole thing. But essentially we start off with our shareholders who own our target S corporation.

The step one is that the shareholders do what is called a contribution of shares. They essentially they form a new S corporation and they contribute their shares in the target to the new S corporation in exchange for the shares of the new S corporation. So they basically slide in this NewCo as an indirect owner. So now, where we originally had shareholders owning target. Now we have shareholders that own NewCo S corporation which then own in turn own the previous target corporation. So we have a 3 tier structure now instead of 2.

In step 2 NewCo then elects to treat the target as what's called a Q sub, which causes a deemed liquidation of the target's assets and liabilities into NewCo for tax purposes. Again, the assets and liabilities for all legal purposes are still in target. The Q Sub. But for tax purposes they've all moved up here into NewCo, which is, which is what achieves the result that we want.

And then the the next step is that NewCo sorry. The target essentially converts into an LLC. In most jurisdictions it's not so. It's not so simple in Delaware and in California, for example, there is a conversion statute which requires you just file a piece of paper, and then proof you're at what was an S Corporation is now an LLC.

For all purposes. In most States that doesn't work. New York, for example, has no such statute. So instead, we go back to our good old friend, the reverse triangular merger. So we have. We form a new LLC that's going to be our merger sub. We merge the new LLC and the target together, and the resulting corporation is the LLC. So now we end up with shareholders who own NewCo S Corp which in turn own new target company LLC.

Louis Vlahos: 2 2 quick points here, if I may. Avi first, when you have the Q sub election once you're there. If there are any assets that the buyer is not going to want, or that the seller wants to keep, with the buyer's permission. That's the time to distribute them out of the Q sub up into Newco, because it's a non event for tax purposes. Okay, be careful on the State side. But for tax purposes it's a non-event.

That that's something to do it. I've had that with environmentally challenged real estate. For example, we had the target. That's how we removed it out. We deeded it out to to the new code. I don't know why it was still in the same company as the business, but it was also on this side an important point the EIN carries over from the old S Corp. To the Q Sub. To the new LLC.

Yeah. Yeah. And then, and then our final step, which should stay step 4. But says, Step 5. The new Co. Can now sell it the LLC Interest to the buyer which accomplishes everything that we wanted. So now buyer gets to treat all of this as an asset sale. The seller has accomplished its stock sale treatment through the deemed liquidation. And now it's ultimate sale of LLC Interests. And now buyer can take hold of LLC Interests rather than S Corp Stock which it cannot own. It also allows you to facilitate a tax deferred Rollover, that allows Seller to take a piece of buyer interest on a going forward basis without paying stock on it until it has a liquidation event.

Yeah, the the S Corporation, the the new code would transfer over. It's a 5 to 20% depending on the situation of its membership interest in the new LLC. Up into new code there, which may be a partnership. Okay, with the PE fund, or especially, you set a partnership for acquisitions, because you want that to be a tax free. Rollover, okay, into a contract into a corporation may be difficult, because they probably won't qualify under 351. Right? You're not going to get 80% control of that entity, but the balance of the membership can be sold, and it will be respected as a sale of the assets. Okay.

Whoever gets the Rollover interest the rollover contribution is going to drop it down into the acquiring entity, anyway, here, so.

Avi Sinensky: Alright. So with with that, that's the end of our presentation. I know we threw a lot at you, especially in that back half. So if there are any, follow up questions or anything you want to discuss further, please feel free to reach out to either of us. We're happy to be a resource going forward for any questions you may have on this subject, matter or otherwise, and don't don't hesitate to reach out so.

Jonathan Shenkman: Great. Thank you so much to Avi and Lou. If anyone's any specific questions, new business opportunities, or any other issues they'd like to discuss again. Please feel free to reach out directly to Avi Lou or myself where appropriate, and I'll be sure to include their contact information in the follow up email to this program.

As I mentioned at the onset, the goal of these programs is stay up to date on timely wealth management, related topics and to collaborate where appropriate. I think we can all agree that the clients who are best prepared are the ones who are served by a team of knowledgeable advisors 4 more quick items before I let you go first.st And most important later. Today you'll receive an email from me with an evaluation form for the program.

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