Treatment of property other than stock received in a merger or acquisition.The IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. recently issued a ruling on the tax treatment of property other than stock - e.g., cash, notes, securities, receivables Receivables An asset designation applicable to all debts, unsettled transactions or other monetary obligations owed to a company by its debtors or customers. Receivables are recorded by a company's accountants and reported on the balance sheet, and they and include all debts owed and other assets other assets Assets of relatively small value. For financial reporting purposes, firms frequently combine small assets into a single category rather than listing each item separately. ("other property") - received by a shareholder in an otherwise nontaxable adj. 1. Not subject to taxation; - of goods imported into a country or sold at retail outlets; as, most laws imposing sales taxes make food nontaxable s>. Opposite of taxable nt>. Adj. 1. statutory merger or asset acquisition (Rev. Rul. 93-61). In Clark, 489 US 726 (1989), the sole shareholder of Target Corporation in a merger exchanged his Target stock for shares of Acquiring Corporation plus cash. The Supreme Court applied the dividend equivalency equivalency the combining power of an electrolyte. See also equivalent. rules for redemptions to determine whether the cash payment had the effect of a dividend distribution. At issue was whether the cash distribution should be treated as if it were made by: 1. Target in a hypothetical Hypothetical is an adjective, meaning of or pertaining to a hypothesis. See:
2. Acquiring Corporation in a hypothetical redemption of Acquiring stock that the shareholder would have received in the reorganization exchange if there had been no cash distribution. If approach #1 applied, since the sole shareholder of Target Corporation would have no change in his percentage of ownership, the hypothetical redemption would be treated as a dividend. On the other hand, if #2 applied, since the sole shareholder of Target would have only a small percentage ownership in Acquiring Corporation, the hypothetical redemption would be treated as a capital gain. The Court concluded that the treatment of the cash distribution is determined "by examining the effect of the exchange as a whole," and that approach #2 better tested the effect of the cash payment as a component in the overall exchange, thereby resulting in a capital gain. In Rev. Rul. 93-61, the IRS adopted the Court's position and revoked Rev. Rul. 75-83, which had espoused approach #1. The Service also will not challenge a shareholder's tax treatment of other property received in an acquisitive reorganization if such treatment is consistent with either the Clark decision or the IRS's prior position, provided that the reorganization was consummated con·sum·mate tr.v. con·sum·mat·ed, con·sum·mat·ing, con·sum·mates 1. a. To bring to completion or fruition; conclude: consummate a business transaction. b. on or before Mar. 22, 1989 (the date of the Supreme Court's decision in Clark) or consummated after that date under terms of a plan of reorganization adopted on or before that date. In any statutory merger or asset acquisition that involves receipt of property other than stock, careful planning is required to achieve the desired tax treatment. |
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