Stock Swaps: Tax Free Reorganizations

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.

  • “Solely” Voting Stock. Any stock transferred to selling stockholders must consist only of “voting” stock. The buyer cannot use any other consideration in the transaction, including non-voting stock without killing the tax-free nature of the exchange.
  • Continuity of Interest. The continuity of business enterprise and the continuity of business purpose requirements must both be fulfilled in order for tax-free exchange option to be made 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.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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