With so many transactions, mergers, and acquisitions within companies, why is it important
to hire and maintain adequate tax staff? Mergers and acquisitions do not fall out of the
sky fully assembled. Instead, they require countless hours of meticulous effort
throughout their different phases, placing demands on team members across an entire
organization. I believe tax accountants play an important role in any merger or
acquisition that wants to be successful. Before closing out marathon sessions with
buyers with hopeful smiles and firm handshakes, an accurate and reliable foundation
must first be established. Tax accountants must provide a secure foundation for
ownership to reach their goals. Sounds like tax staff is the key for successful
negotiations—that should be established and ready to sell in the first place. While
accountants make sure ledgers are clean, old balances are taken care of, and everything
is in full compliance with US GAAP, tax staff should review classification of assets and
liabilities as current and non-current will be particularly important as components of
networking capital. This could have a substantial impact on cash and liability, something
that buyers and sellers alike are tuned into.
What importance does tax planning provide during a sale or acquisition of another
company? Including tax liabilities, all the accounting should be straightforward, precise,
and compliant. Since both mergers and acquisitions create an abundant amount of work
for everybody else, these accounting efforts need to be done in a timely manner,
preferably as soon as possible to prevent delays and time crunches. Buyers need
assurance that the target business is not one of those struggling subsidiaries that will
want standalone financials.
The discussion assignment does not require any significant research but, given our goal
of developing and enhancing our skills, it would be helpful if you identify specific IRC
sections associated with mergers and acquisitions and describe what those sections
require. This will demonstrate the level of complexity in the law and bolster your
argument for appropriate tax staff.
As an example – consider the following situation:
Corporation A is very profitable and anticipates being profitable for many years to come.
Corporation B is a competitor of Corporation A’s but has not enjoyed the same level of
success, in fact, it has significant unused net operating losses.
Corporation A’s CFO has suggested that Corporation A acquire Corporation B in a tax-
free transaction (Corporation B shareholders will tender their Corporation B shares in
exchange for Corporation A shares) so it can utilize those net operating losses to offset
Corporation A’s taxable income.
Corporation B has a market value of $1,000,000 and Net Operating Loss carry-forward
of $5,000,000. The net operating loss of $5,000,000 will reduce Corporation A’s tax
liability by $1,050,000 (21% of $5 million) thereby making this effectively a free deal.
Corporation A’s CEO is quite excited about this and has a few options:
A. meet with the board of directors on Friday to obtain approval for the deal
B. b ask the CFO to identify other acquisition prospects that have similar tax attributes
C. seek the advice of the company’s tax advisers
D. b fire the CFO
