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Tax in a Down Market: A new market for M&A brings some new tax issues.

Article Excerpt
Byline: David H. Schnabel and Michael Bolotin

Dealmakers guided by the old maxim that buyers prefer asset sales and sellers prefer stock sales may want to check their compass - bad markets have a way of turning common wisdom on its head.

In buying a business, acquirers prefer a high "tax basis" in the assets of the business, including goodwill. Tax basis generally may be amortized over the life of the asset. This reduces the taxable income (and tax) of the business and frees cash that can be used to either repay debt, reinvest in the business or pay dividends. Similarly, if an asset (or division) is to be sold, a higher tax basis can mean less taxable gain and more after-tax proceeds.

Most businesses are held by corporations. If the stock of a corporation is purchased, the tax basis in the assets of the corporation are generally not reset as a result of the purchase. By contrast, if the assets of the corporation are purchased, the tax basis of the assets are generally reset to equal their fair market value (based on the purchase price). When values are going up,...

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