Internal Revenue Code section 368.13 allows a corporation that is being purchased by another to enjoy certain tax-free advantages. The rules are complex, so it is a good idea to work with a Boston tax-planning attorney before you proceed with the sale.
In order to qualify for this tax-free status the corporation must organize its sale in such a way that it qualifies as a reorganization. Depending on certain provisions, the tax savings may be partial or entire to the shareholders. This is accomplished by taking the purchasing corporation’s stock in trade for the stock or assets of your business. The shareholders do not have to pay tax on the stock they receive until they sell it, so in essence this is a form of deferring capital gains.
As with any more complex tax issue, failure to comply very specifically with the details of this reorganization will result in loss of the tax deferral. Moreover, the deferral only applies to stock taken in trade, and not to any additional cash or property that is received in the sale.
This type of reorganization only works well if the corporation purchasing your company is financially viable. Federal tax laws require shareholders to hold on to the stock for up to two years after the sale in order to retain the tax deferral. Because you no longer have control over the value of your stock (now that it is no longer your business), you can’t be sure that the purchasing corporation will remain strong during that time. Therefore, your stock may be worth less by the time you are able to sell it. Your Boston tax planning attorney will review the details of the sale to ensure that a reorganization is the most financially advantageous way to sell off your corporation.
For Further Information
If you need further information about tax-free reorganizations, or need assistance in any other business law matter, Boston tax planning attorney David Ionson will be happy to meet with you. Please call (781) 674-2562 to set up an appointment.