With so many transactions, mergers, and acquisitions within
companies, why is it important to hire and maintain adequate tax
staff?
As we discussed last week, tax laws are complicated and if your
company does business internationally it becomes even more
complicated as every country, state, or region has different tax laws
which will affect your business. All companies want to minimize their
tax impact and in doing so they need to have educated, well-trained
employees and have an adequate number of tax staff in place in
order to meet these needs. The number of employees in the tax
department will vary depending on the size, complexity, industry, and
the company’s growth plans. A smaller less complex business will
have maybe 1 or 2 tax employees while a large billion-dollar
international business will probably have 12 or more tax employees.
What importance does tax planning provide during a sale or
acquisition of another company?
Knowledge is power and when merging or acquiring another
company knowing tax laws and tax rulings is key to a successful
merger or acquisition. “The potential tax consequences of a merger
or acquisition to a business entity and its owners – and the
complexity of the tax principles involved – dictate that one of the
most critical aspects of structuring such a transaction is tax planning”
(Bloomberg Tax).
Two of the Internal Revenue Codes affecting mergers and
acquisitions are: IRC section 368 and section 269 (this is not a
complete list of IRC codes affecting mergers and acquisitions, these
are just two that I am mentioning). Section 368 is the definition
relating to corporate reorganizations. Reorganizations include a
merger or consolidation or acquisition by one corporation in
exchange for all or part of the other company’s stock. This section
also helps in determining if the merger or acquisition will be
considered taxable or non-taxable. To qualify as a non-taxable
transaction, it must meet three requirements. First the transaction
must be a business transaction and not personal in nature. Second,
the owners of the acquired business must continue to have a
proprietary interest in the reorganized company. Third, all or a
significant portion of the company’s business must be maintained. In
other words, a company cannot acquire a business for the sole
purpose of obtaining their debits in order to lower their tax
obligations.
If the IRS suspects that a merger or acquisition was done solely to
lower their tax obligations, then Section 269 will come into play.
Section 269 addresses acquisitions made to evade or avoid income
tax and may disallow any tax benefits if the “ownership of stock
possesses either (1) at least 50% of the total combined voting power
of all classes of stock entitled to vote; or (2) at least 50% of the total
value of the shares of all classes of stock” (Knight, 2021). But if there
was only one shareholder owner and they retained the voting rights
of those shares before and after the merger or acquisition then
section 269 will not apply, and any tax benefits can be used by the
new corporation. However, the IRS may decide to put limitations on
those benefits which you may or may not know right away.
Again, having the right staff in place in order to research all possible
tax outcomes is critical when deciding to merge or acquire another
company.
References:
Envoice. (2022, June 30). How Many Accountants Does A Company
Need? Envoice. https://envoice.eu/en/blog/how-many-accountants-
does-a-company-need/
Knight, R. A. (2021, February). Acquiring the tax benefits of a
corporation. Journal of Accountancy; Journal of Accountancy.
https://www.journalofaccountancy.com/issues/2021/feb/tax-
benefits-of-a-corporation.html
Tax Considerations in M&A and Restructuring. (n.d.). Bloomberg Tax.
https://pro.bloombergtax.com/brief/tax-considerations-in-ma-and-
restructuring/
