Designed to qualify as a tax-free B reorganization a Section 368(a)(1)(B) stock swap, the tax consequences of such a reorganization are virtually identical to that of a statutory merger. In this instance the buyer organization would transfer voting stock to the stockholders of the selling organization in exchange for all their stock. The main tax difference in this scenario would be that the seller stockholders would not be required to recognize any taxable income on the exchange because only stock is ever delivered to them, not cash.
How to qualify for a tax-free reorganization?
There are a couple of key requirements that will make a tax-free reorganization in stock swaps possible.
Tax-free stock swaps are not for every deal. In fact, in most cases, the seller will want or need some cash. The times when such a deal makes the most sense is when the selling stockholders have enough savings, cash and investments that they may not necessarily need the lump-sum payout to make ends meet. In short, it works best for those who don’t need it and, frankly, benefits them more than the average business owner. It’s unfortunately another example of how the rich can get richer, but it’s an excellent benefit for those looking to avoid tax when doing a deal.