Treatment of property other than stock received in a merger or acquisition.

• Author: Zimbalist, Bill
• Position: Brief Article

The IRS recently issued a ruling on the tax treatment of property other than stock - e.g., cash, notes, securities, receivables and other assets ("other property") - received by a shareholder in an otherwise nontaxable statutory merger or asset acquisition (Rev. Rul. 93-61).

In Clark, 489 US 726 (1989), the sole shareholder of Target Corporation in a merger exchanged his Target stock for shares of Acquiring Corporation plus cash. The Supreme Court applied the dividend equivalency rules for redemptions to determine whether the cash payment had the effect of a dividend distribution. At issue was whether the cash distribution should be treated as if it were made by:

1. Target in a hypothetical redemption of part of the shareholder's Target stock prior to and separate from the reorganization exchange, or

2. Acquiring Corporation in a hypothetical redemption of Acquiring stock that the shareholder would have received in the reorganization exchange if there had been no cash distribution.

If approach #1 applied, since the sole shareholder of Target Corporation would have no change in his percentage of ownership, the hypothetical redemption would be treated as a dividend. On the other hand, if #2 applied, since the sole shareholder of Target would have only a small percentage ownership in Acquiring Corporation, the hypothetical redemption would be treated as a capital gain. The Court...