Mergers & Acquisitions

RE: 338(h)(10) elections and NOLs

1) Correct. Because I am selling you my stock, it is taxed at my respective individual level. My company isn't physically being touched or doing anything. Just a xfer of ownership. You, the acquiror, of course, will incur goodwill since you are buying my company. 2) A seller is motivated to do a ... 1) Correct. Because I am selling you my stock, it is taxed at my respective individual level. My company isn't physically being touched or doing anything. Just a xfer of ownership. You, the acquiror, of course, will incur goodwill since you are buying my company.

2) A seller is motivated to do a 338(h)(10) only if they are a pass-thru entity, ie S-Corp, LLC, LLP, etc. hence, you rarely, if ever, see 338(h)(10)s done on public to public deals. The latter falls under 368(a)(1)(a), 368(a)(1)(b) or 368(a)(1)(c) which are effectively stock reorgs. The exception, as we spoke about, were the case of offset gains with NOLs that would be worthless under Section 382 limitation or in the case of subsidiaries (considered as passthru entity under Section 223).

3) Yes. If you are an S-Corp, and DON'T do a 338(h)(10) election, you have some very poor advisors. Since everything is looked at from an after-tax basis, the Acquiror can pay more since they can deduct taxes on the "depreciation of goodwill". The Acquiror is looking at Accretion/Dilution analysis (maximizing/increasing EPS) and the Seller cares about after-tax proceeds, net to the individuals (or rather, they SHOULD be looking at those). And 338(h)(10) elections are usually the best. There are definitely exceptions that I can't think of right now, but globally speaking, correct.

4) Correct as well. LLCs and LLPs are pass-thru entities. The major financial difference (putting aside legal form for a sec) is that S-Corps are effective pro-rata, whereas with LLCs and LLPs, your ownership %age could be different from your profit share %age, as LLCs and LLPs utilize capital accounts based on an agreed formula and doesn't have to be pro-rata. Now, from the legal point of view, all structures have "corporate veil"'; howveer, with LLPs for instance, the offending partner(s) are personally liable as well, whereas the non-offending partners liability are limited only to their capital account balance (capital they put in, etc). In the case of Arthur Andersen, the handful of convicted partners are personally liable whereas the remaining thousands of partners only lose their monetary stake in the company. In the case of private equity funds and hedge funds, there's ALWAYS a "GP" (General Partner) who has unlimited liability and the "LPs" (Limited Partners) only contribute $ and can lose all of that $ but not more. So yes, in short, correct. Read More

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by WST Expert 1.

added 11 years ago

RE: 338(h)(10) elections and NOLs

In that case, can a buyer who is a s-corp, llc, llp use section 338(h)10 or can it only be used by a buyer who is a c-corp bc only in this strucure is there double taxation events (the s corp, llc, llp pass through everything, so there would be no need to do a 338(h)10 if the buyer were somehting li... Read More

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by Guest 1.

added 11 years ago

RE: 338(h)(10) elections and NOLs

338(h)(10) can be elected by any corporate form. Buyer can be anything (C-Corp, S-Corp, etc) and Seller as well. Obviously 338(h)(10) works best if the Seller is a passthru entity or make use of NOL, etc. If the Buyer had to be S-corp or other passthru, then that removes the advantages of a 338(h)(1... Read More

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by WST Expert 1.

added 11 years ago

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