Because the merger is designed to be tax deferred. Read point E.
Tax Deferred Reorganizations (for example the reverse triangular merger). There are a number of forms of tax
deferred reorganizations, each with separate technical requirements which must be met. Some
forms are stock acquisitions and others are essentially asset acquisitions, however, the ultimate
results are generally similar.
3
(a) Shareholders of the target corporation generally recognize
no gain or loss. Certain nonstock consideration may be taxable “boot.”
(b) The shareholders of the target corporation generally receive
stock and sometimes some other forms of consideration (called “boot” in tax jargon); their basis
in the stock will be a substituted basis (i.e., the same as their stock in the target corporation) and
their basis in the boot will be fair market value.
(c) The target corporation’s “inside” basis in its assets will be
its historic basis in the case of stock acquisitions, and a carryover basis from the target in the
event of asset acquisitions.
(d) The basis to the acquiror of the stock acquired will
generally be a carryover basis in the event of a stock acquisition (except for a reverse triangular
merger where this basis will be the target’s asset basis); the target’s stock will generally retain
historic basis in an asset acquisition.
(e) The target corporation will not recognize gain or loss.
(f) Tax attributes will remain with the acquired corporation in
a stock acquisition; in an asset acquisition, the tax attributes may be inherited by the acquiror. In
both types of acquisition, certain limitations and restrictions on NOLs will apply.
(g) In all reorganizations, a certain amount of continuity of
interest by the target’s shareholders will be required.
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