Essential Fundamental Structures for Federal Tax Basis Step Up in M&A Transactions: A Primer
The acquirer's tax basis in the acquired assets is equal to its purchase price (cash, plus notes, plus assumed liabilities).2 The tax bases of assets are allocated to the seven asset classes pursuant to I.R.C. section 10603 using the residual method based upon the relative fair market of each asset, with the residual allocated to goodwill. [...]there may also be advantages regarding voting approval for the transaction under applicable state law. [...]the acquirer may be required to reimburse the seller for any legal and transfer costs of transferring the assets and any liabilities to the newly formed LLC See Exhibit 2 for an example of a Subsidiary-LLC structure. "14 The purchaser must be a corporation (C corporation, S corporation, or foreign corporation).15 An individual does not qualify as a "purchaser";16 however, an individual may organize a new corporation to make the acquisition.17 A purchase does not include (1) carryover basis transactions (I.R.C. sections 351, 354,355, or 356) or transactions where basis is acquired from a decedent; and (2) certain related party purchases under I.R.C. section 318 (without regard to option attribution).18 A newly organized purchasing corporation must not liquidate or merge "downstream" following the acquisition, otherwise it may not be viewed as the true purchaser.19 The target or acquired corporation may liquidate post-acquisition without negatively impacting the I.R.C. section 338 election.20 The acquisition must be a qualified stock purchase ("QSP").21 In a QSP, the purchasing corporation must acquire stock possessing at least 80% of the voting power and at least 80% of the value of the target stock during a 12-month acquisition period in one, or a series of transactions.22 Complex consistency rules may apply where there is a QSP but no I.R.C. section 338 election is made.
Iannone, P. N., Pannese, D. A., & Boyer, B. (2023). Essential fundamental structures for federal tax basis step up in M&A transactions: A primer. Journal of Taxation, 138(4), 11-21.