mergers & acquisitions - us.eversheds- · pdf filesalt issues in mergers and acquisitions...

SALT Issues in Mergers and Acquisitions

Amy F. Nogid – Counsel, Sutherland Olga Jane Goldberg – Associate, Sutherland Houston SALT Roundtable Houston, TX September 10, 2015

©2015 Sutherland Asbill & Brennan LLP

M&A “Hot” in Oil and Gas Industry

• In 2014, M&A in the oil and gas industry hit 10-year highs in terms of both deal value and volume

• 2015 has been slower, but deals appear to be on the rise: Driven by midstream transactions Drop in upstream transactions, but recently major oilfield

services deals have been announced

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Getting Your Ducks in a Row

• Initial questions for purchasers to ask: WHO (or what) is being acquired? WHAT is the nature of the transaction? WHERE are the assets located and/or where is the target’s

business conducted? WHEN will the deal close and what critical due diligence

must be accomplished before closing? WHY must these questions be addressed by purchasers?

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WHO (What) is Being Purchased?

• Stock or asset acquisition? S corporation? Partnership interest? LLC interest?

• If stock acquisition, it is critical to know the target: Determine the potential exposure for target’s prior tax

liabilities, in particular, trustee taxes (sales, withholding) Consider target’s tax filing history (including elections) and

its impact on purchaser’s tax filings (nexus in additional jurisdictions, impact on combined return jurisdictions, and apportionment implications)

Will an IRC § 338(h)(10) election be made? Evaluate general tax risk:

Has the target been aggressive in its tax positions? Have material errors been uncovered?

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• If asset acquisition: Type of assets: will any tax or unclaimed property liabilities

move with the acquired assets? Acquisition of “all” or “substantially all” of the assets may

trigger successor tax liability in certain states for certain taxes

Will the seller continue in business? Location: will it create nexus for purchaser in a new

jurisdiction? Don’t lose sight of localities!

WHO (What) is Being Acquired?

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Initial Step – Scope Out Review

• Review acquisition and related documentation Internal memoranda; any analysis by federal tax personnel

or outside counsel

• Do your due diligence Review financial statements (e.g., focus on ETR,

discontinued operations, reserves, and footnote disclosures) Review federal income tax returns (e.g., taxes paid

deduction, other deductions, intercompany transactions, NOL, credits and other tax attributes)

Review state and local tax returns (e.g., where filing, how filing, extent of footprint in jurisdiction, issues and positions taken, NOL, credits and other tax attributes)

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• Do your due diligence (cont’d) Review organizational chart Review all publicly available documents (e.g., Internet, SEC

filings, target’s website) Review potentially significant documentation (e.g., debt

agreements, transfer pricing agreements, listing of entity registrations)

Interview target’s management and tax personnel (e.g., Are there any ongoing audits? What issues have been raised on audit?)

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• Determine whether any pre-closing, time-sensitive tasks must be undertaken For asset acquisitions, consider bulk sale

notification/successor liability requirements Confirm that target is continuing to meet its estimated tax

and other filing obligations

• Identify potential issues quickly to increase likelihood that the issues can be adequately addressed Purchase price adjustment? Escrow? Indemnification?

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• Determine how best to minimize risks associated with the acquisition and ensure that the acquisition documentation and terms of the transaction adequately address remaining risks Tax sharing agreement?

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Identify Tax Risks – Sellers

• Need to consider whether transaction results in gain or loss and how it will be treated for state/local tax purposes: IRC § 338(h)(10) election made?

Will states recognize? Is a separate state election required or permitted?

Will the proceeds be included in the sales factor? Business/nonbusiness income/loss?

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Identify Tax Risks – Purchasers

• Nexus created? Consider economic and attributional nexus implications

• IRC § 338(h)(10) election made? Consider impact of step-up in basis (e.g., capital tax, IRC §

197 amortization)

• Loss of P.L. 86-272 protection? • Impact on current filing positions

Combined reporting and “instant unity”

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Identify Tax Risks – Reorganizations

• Generally, reorganizations that are tax-free for federal income tax purposes are also tax-free for state/local INCOME TAX purposes State/local gross receipts, sales and real property transfer

taxes may apply

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Identify Tax Risks – Spin-Offs

• Generally, states follow the federal treatment of IRC § 355 spin-offs Check federal conformity dates

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Potential Net Operating Loss (NOL) Issues

• Don’t assume that target’s federal NOLs will be the same for state/local purposes or will be available to target States often have their own NOL carryover rule and do not follow IRC §§

381 and 382 Different computation (state-specific modifications; apportionment;

business/nonbusiness treatment) Different carryforward periods Periods of suspension may occur Limitation in amount to extent attributable to in-state activities Limitation on use of target’s NOLs only if it is the survivor

Some states will permit the use of the target’s NOLs even if it does not survive if the target’s business is continued by the survivor

States can adjust NOLs in the application year, long after the limitations period on assessment has run

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Potential Sales Tax Issues

• Sales of tangible personal property generally subject to tax unless an exception or exemption applies Does state exempt or exclude isolated, casual or occasional sales? Does state exempt or exclude transfers pursuant to a statutory

merger, incorporation, liquidation or reorganization? Carefully consider exemption language (e.g., may require that

the transferred assets be exchanged for the company’s stock or at time of organization of new entity)

Is the asset exempt? (e.g., inventory, intangible property, real estate, manufacturing equipment)

IRC § 338(h)(10) generally not considered asset sale for sales tax purposes

Consider possible click-through nexus exposure

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Potential Sales Tax Issues

• Other considerations Is the target involved in a “gray area” business? Are exemption certificates retained? Use tax exposure

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Potential Transfer Tax Issues

• Need to consider whether there will be a transfer of real property or, in some states, a transfer of a controlling economic interest in real property

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Potential Unclaimed Property Issues • All states have unclaimed property laws that require

the turnover to the state of certain types of property that have been abandoned by their owners for a statutorily prescribed period of time

• Not a tax; liability can exist even if nexus does not exist; often long look-back period

• States target acquisitions in audits and if there is a lack of information may use estimation to determine liability If business has a practice of taking unclaimed property into

income (e.g., uncashed checks) exposure exists

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Potential Property Tax Issues

• Are there any liens on property?

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Potential Employment Tax Issues

• Worker classification issues • State unemployment tax

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Other Potential Issues

• Remember to include localities in review (list not inclusive) California (Los Angeles, San Francisco); Kentucky

(Louisville, Lexington); Michigan (Detroit); Missouri (St. Louis); Ohio (Cleveland, Cincinnati); Pennsylvania (Philadelphia, Pittsburgh), Virginia (Alexandria)

• Remember to address locality licensing issues • Remember to address any industry-specific taxes

Fuel taxes, spill taxes, severance taxes, excise taxes (federal and state)

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Tax Sharing Agreements

• Should address: Responsibility for tax payments for pre-transaction

years/entitlement to refunds for pre-transactions Party entitled to use tax attributes Cooperation of Seller’s personnel if tax issues arise Retention of or provision of documentation impacting tax

determinations Responsibility for RAR and amended return filings Party authorized to handle and resolve pre-transaction tax

matters

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Questions?

Amy Nogid

Counsel Sutherland Asbill & Brennan LLP

212.389.5086 [email protected]

Olga Jane Goldberg

Associate Sutherland Asbill & Brennan LLP

713.470.6121 [email protected]

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Visit us at www.stateandlocaltax.com

@Sutherland_SALT Sutherland SALT Group

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