Structuring minority interest acquisitions with a step-up in basis
INSIGHT ARTICLE |
In many private equity merger and acquisition (M&A) transactions, the private equity firm invests in a noncontrolling interest in the target entity. Where the private equity investment funds payments to pre-transaction shareholders, the shareholders generally realize gain upon receipt of these payments. As with many M&A issues, the specific facts of a transaction are critical, and special care should be taken to fully analyze all aspects of a transaction for tax traps and opportunities. If structured properly, the transaction often provides a step-up in asset basis to either the target entity or the private equity firm that provides tax benefits in the form of future tax deductions. However, the failure to properly structure a transaction can result in ordinary income, as opposed to capital gain, to the pre-transaction target entityshareholders due to the related-party traps of sections 1239 and 707.
In this article previously published in The Tax Adviser, authors Nick Gruidl and Corey Wittersheim discuss the recent decision in Fish, T.C. Memo. 2013-270, which serves as a reminder of the potential traps associated with M&A transactions and the importance of properly structuring a minority investment.