Buying or selling C corporation stock.

AuthorEllentuck, Albert B.

UNLIKE AN ASSET SALE, A TAXABLE STOCK SALE does not result in the recognition of taxable income or loss at the corporate level. The differences between the basis and fair market value (FMV) of corporate assets are deferred instead of recognized immediately, as they are in an asset sale. Although the selling shareholders may recognize taxable gain on the sale of their shares, the double-taxation problem is deferred and becomes the responsibility of the buyer (for the corporate portion of the double taxation).

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In a taxable stock sale, the corporation's tax attributes (net operating loss (NOL), capital loss, and tax credit carryovers and certain built-in losses) come under the control of the buyer. However, these tax attributes can be subject to severe restrictions after a corporate ownership change under Secs. 382 and 383. In an asset sale, the selling corporation's tax attributes remain under the control of the seller, and these attributes can be used to offset income and gains resulting from the asset sale.

Nontax issues may dictate a preference for an asset sale or a stock sale. Purchasers generally try to avoid acquiring stock because the target corporation may have contingent or undisclosed liabilities the purchaser will inherit if stock is acquired. However, if a target has valuable nonassignable assets (such as a license agreement or a favorable lease), acquiring stock may be more appealing to the purchaser.

For a selling shareholder, a taxable stock sale (as opposed to an asset sale by the corporation or a tax-free reorganization) makes sense in the following situations:

  1. Double taxation will erode the proceeds the seller nets from an asset sale by the target followed by a liquidation of the target.

  2. The seller can shelter gains from the stock sale with NOLs or capital loss carryovers.

  3. The seller can recognize a loss (perhaps an ordinary loss under Sec. 1244, as discussed below) on the sale of the target's stock.

  4. A tax-free reorganization is unattractive because the seller wants cash, or a limited market exists for the stock of the acquiring corporation.

    For a buyer, a taxable stock purchase makes sense in the following situations:

  5. The target holds depreciated assets (basis greater than FMV) so the issue of stepping up the basis of the assets is not applicable.

  6. The target's tax attributes have value even after application of the Sees. 382-383 limitation rules. If the buyer makes a direct asset...

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