In case of purchase of shares, the buyer usually becomes responsible for the known and unknown commitments of the objective as soon as he takes legal ownership. Contact an M&A expert to conduct a detailed due diligence study of the target to avoid any unpleasant surprises on commitments. 1. A company buys at least 80% of the shares of the target company C or S. For a transfer of shares of S Corporation to be considered QSD, at least 80% of the votes and value of the shares of S Corporation must be disposed of in a transaction or series of transactions within 12 months (Regs). Section 1.336-1(b)(6)(i)). In addition, the tax exemptions provided for in sections 351, 354, 355 or 356 do not meet the QSD criteria. Other situations that are not qualified as QSD are sales, exchanges or distributions to relatives; transactions in which the basis of the purchaser is determined in whole or in part by reference to the base in the hands of the person from whom the shares are acquired; and shares acquired by a deceased person on the basis of Article 1014(a) or Article 1022. Since all things are equal, buyers prefer a sale of assets, while sellers prefer the sale of shares.
A sale of assets is beneficial for the buyer because it allows him to increase the base of acquired assets, which accelerates higher depreciation and reduces taxable income. It also helps the buyer avoid unwanted or unknown debts that may arise during a stock sale where the seller`s «past skeletons» become the buyer`s problem. From the seller`s point of view, the sale of shares is advantageous, since the proceeds are taxed at advantageous capital gains rates and, in the case of a C-Corporation, save them from double taxation. Buying the shares of a target company is a relatively simple legal process. The buyer gets control of the target`s assets without any problem, since he owns the shares of the other company. Typically, you need expertise to assign the purchase price to specific assets to determine their initial tax base. Your tax advisor should work closely with the expert to ensure the best tax outcome for your business. When the buyer and seller begin the negotiation process, the purchase price seems to receive all the attention, and for good reason. After all, price is what sets the conversation in motion. However, on the eve of the negotiations, most of the transaction structure is at the forefront.
As they say, «The devil is in the details.» Section 338 provides for two elections: the so-called «lawful election under section 338» in accordance with section 338 (g) and the other under section 338 (h) (10). . . .