The Many Essential Ways in Which An M&A Tax Practitioner Contributes to a Successful Transaction

There are various types of tax professionals who practice in the M&A space. An obvious one is a tax lawyer who can weave both tax and non-tax issues together to produce a tax-efficient transaction. That skill, no doubt, is invaluable, in as much as weaving together even a couple provisions, let alone scores, of the Code, is daunting, and incurring a large tax bill can dampen the appeal of selling a business.

A less obvious, but no less important type of M&A tax advisor, is what I refer to as an M&A tax practitioner. A competent M&A tax practitioner not only adds value in the tax structuring aspect of the transaction, but also in deciphering and navigating the nuts and bolts of tax.

Take, for instance, the tried and true S corporation “F Reorg” preceding an equity purchase. In addition to understanding the substance and tax ramifications of such a transaction, M&A tax practitioners are also intimately familiar with the issues that impact the parties post-close, such as ongoing tax return filing obligations, loss recognition events, effective gain deferral strategies, and the meanings of cryptic IRS correspondence relating to the transaction. An experienced M&A tax practitioner will also identify more nuanced issues that could affect the proposed structure of a transaction, such as previous “check the box” elections, the rules surrounding EIN retention, the delicate interplay between some types of earn-out payments and compensation, bargain sales of equity to employees, pre-transaction shareholder distributions, and implications of certain related party transactions.

A well-versed M&A tax practitioner also helps unpack the buying and selling parties’ numerous post-closing transaction-triggered tax issues, so that the terms of the transaction that were so carefully baked into the transaction’s purchase agreement find their way onto the tax returns of the parties. For example, if the equity purchase agreement contemplated a section 338(h)(10), the tax practitioner helps to ensure the election gets filed timely, that the purchase price allocation reflects the previously agreed-to methodology, and that the transaction is otherwise reported as an asset sale for tax purposes. Likewise, if the transaction called for the seller/target’s section 336(e) election, attention will be given to potential new “S” elections, the timely-made section 336(e) election itself, and the filing of short period tax returns. While these might seem like mundane tasks, their importance cannot be overstated; the mishandling (or omission) of any of these tasks can cause additional significant expense to the buyer or seller, and possibly jeopardize the expected economics of the deal.

Given the prevalence of various tax elections in the M&A space, the missing of a tax election due date is not uncommon. An M&A tax practitioner’s practical experience, however, can unlock many legitimate work-arounds, including the preparation of late filing relief requests and reasonable cause letters, identifying and interpreting helpful IRS notices and revenue procedures, and evaluating the risks associated with each potential course of action.

Other post-closing tax issues for which an experienced M&A tax practitioner also lends a hand is in tax attribute usability (e.g., NOL limitations and R&D credits), the advisability of different accounting methods, and the impact of potential loss suspensions or disallowances, to name just a few.

The competent M&A tax practitioner fully grasps the big picture, but also knows how and when to get her hands dirty. This valued deal team member’s job begins before the first draft of the purchase agreement is exchanged, and continues long after a transaction has closed.