Tax Issues in Mergers and Acquisitions

August 23, 2022

With the pandemic accelerating the adoption of technology, many companies have capital to invest. M&A as a growth strategy can help these companies win the race to own emerging technologies, capture new opportunities, enhance current offerings, and cement market leadership.

However, buyer beware: Maximizing value and cash flow amid fast-moving buying and consolidation plans requires a comprehensive tax strategy as well as tax-focused analyses and modeling of any potential deals.

Learn about how Bloomberg Tax helps tax professionals in the technology industry plan today for the realities of tomorrow.

What are the primary tax considerations around mergers and acquisitions?

A merger or acquisition may be a tax-free I.R.C. §368 reorganization or a taxable transaction under the principles of I.R.C. §1001. There may also be state tax consequences from some types of M&A transactions.

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.

The tax department provides the strategic analysis that informs and guides M&A decisions and structuring. This includes reviewing the following through the lens of tax liability and the impact on the cash flow and value of the merged business:

  • Structuring
  • Due diligence
  • Compliance
  • Data retention
  • Integration of systems and departments
  • Legal entities
  • Accounting methods
  • International employment services
  • Cross-licensing arrangements
  • Transaction-cost recovery

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What is a corporate reorganization and how is it treated for federal income tax purposes?

As defined in I.R.C. §368, a corporate reorganization is a term of art used for federal income tax purposes and encompasses various types of transactions, including:

  • Acquisitions of assets or stock of one corporation by another
  • Readjustments of capital structure of a single corporation
  • The division of a single corporation into two or more entities

A reorganization must meet several statutory and common law requirements in order for the participating corporations and their shareholders to avail themselves of favorable tax treatment.

[To learn about the requirements for a transaction to qualify as Type A-G reorganizations, refer to I.R.C. §368(a).]

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What are the tax consequences to the target corporation in an otherwise qualifying reorganization?

An acquired corporation recognizes no gain or loss upon an exchange pursuant to a plan of reorganization if it receives solely stock, securities, or both in a corporation that is a party to the reorganization – and the acquired corporation distributes such stock, securities, or both to its shareholders.

If an acquired corporation receives other property (boot) in the reorganization, it recognizes gain to the extent of the boot if the boot is not distributed to shareholders of the acquired corporation.

The acquired corporation generally recognizes no gain or loss on the distribution of stock, stock rights, or obligations of another corporation that is a party to the reorganization, if the acquired corporation received the distributed property in the reorganization.

The assumption of a liability of an acquired corporation is generally not treated as the payment of cash and no gain is recognized.

[Read more about the rules on recognition of gain or loss to corporations in I.R.C. § 361.]

What are the tax consequences to an acquiring corporation in a reorganization?

In general, the tax consequences to an acquiring corporation are as follows:

  • no gain or loss is recognized to an acquiring corporation upon the issuance of its stock in exchange for property of an acquired corporation; and
  • the basis of an acquired corporation’s assets carry over to the acquiring corporation increased by any gain recognized by the acquired corporation’s shareholders.

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Key IRC Sections

Bloomberg Tax Research is pleased to offer the full text of the current Internal Revenue Code free of charge. This site is updated continuously and includes Editor’s Notes written by expert staff at Bloomberg Tax indicating when a section has been repealed or when there is a delayed effective date, allowing you to see the current and future law. Links to related code sections make it easy to navigate within the IRC.


Definitions Relating to Corporate Reorganizations


Determination of Amount of and Recognition of Gain or Loss


Certain Stock Purchases Treated as Asset Acquisitions

How do you support M&A activity through tax planning and research?

With exclusive access to technology industry data, information, and intelligence from the Bloomberg network, Bloomberg Tax Research provides timely, accurate, and in-depth insight and information to help your team support tax planning for M&A and corporate restructuring with confidence and efficiency.

  • Empower your team with expert analysis: Our renowned Tax Management Portfolios provide expertise and perspectives of leading practitioners from around the world. For M&A, they can help your team understand the principal tax planning considerations for designing an appropriate transactional structure for a corporate acquisition, with deep dives into specific transactional structures.
  • Save time with practical resources: Time-saving practice tools such as charts, working papers, and step-by-step guides help your team conduct M&A tax planning quickly and efficiently. For example, our Deemed Asset Acquisition Election Tool (I.R.C. §338/336(e)) helps you understand the requirements and determine whether your company is eligible to make the election.
  • Shorten research time: We integrate primary sources such as the full text of the Internal Revenue Code and Treasury Regulations with secondary resources like our Tax Management Portfolios, so your team can find the answer to its M&A tax questions faster.
  • Stay up to date: Our news and commentary brings you the latest information and authoritative analysis to help you stay on top of M&A activity and the impact on the industry. Bloomberg Tax Research Solutions features breaking news, updates, insights, podcasts, and special reports.

How can Fixed Assets software support modeling of M&A activity?

Bloomberg Tax Fixed Assets enables technology companies of all sizes to model M&A activity and manage the complete fixed assets life cycle, from construction and purchase through retirement. For complete management and control, the software is equipped with flexible integration capabilities, comprehensive reporting, accurate depreciation calculations, and built-in federal and state law changes.

Our software’s ability to model different scenarios can drive better tax results when one company is acquiring another. If better tax results can be achieved, it effectively lowers the purchase price on the company.

Other key benefits of using Bloomberg Tax Fixed Assets include:

  • Ability to run scenarios on bonus depreciation
  • Insight on ideal timing of an acquisition
  • Ease of merging data from different systems and managing fixed assets centrally

Your M&A tax research starts here

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Deemed Asset Acquisition Election Tool (338/336(e))

Determine whether your tech client is eligible to make the Section 338 election with tools that guide you through the requirements

Portfolio 770-4th: Structuring Corporate Acquisitions – Tax Aspects

Delve into the principal tax planning considerations related to designing an appropriate transactional structure for a corporate acquisition

Tax Practice Series: Corporate Reorganizations

Learn about the rules related to corporate reorganizations, with details on the tax consequences of a reorganization, reporting requirements, and a sample client letter

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