This portion of the introduction to the basic principles of United States federal income taxation of corporate acquisitions is part of the Pillsbury Winthrop Shaw Pittman LLP Tax Page, a World Wide Web demonstration project. Comments are welcome on the design or content of this material.

The information presented is only of a general nature, intended simply as background material, is current only as of the latest revision date, October 15, 2007, omits many details and special rules and cannot be regarded as legal or tax advice.

Escrowed Stock

The right of former Target shareholders to receive Acquiring stock from an escrow established at the time of Acquiring's acquisition of Target can be considered "stock" and not other property.

Among other requirements, the former Target shareholders must be entitled to exercise any voting rights of the escrowed Acquiring stock and to receive any dividends declared on that stock and the amount of stock issued into escrow cannot exceed the amount of stock issued outright.

Stock issued into escrow is treated as issued to Target shareholders at the time of the acquisition; thus no imputed interest arises when the stock is released from escrow.

The former Target shareholders recognize gain or loss if escrowed Acquiring stock is used to satisfy a liability, as if escrowed shares had been sold at that time for their fair market value, if the number of Acquiring shares used is determined by the stock's then fair market value. No gain or loss is recognized if the number of Acquiring shares is determined based upon their fair market value at the time of the original acquisition.

Contingent Stock

Similarly, the right of former Target shareholders to receive Acquiring stock to be issued to them at a later date can also be acquired "stock" and not other property.

The maximum amount of contingent stock which could be issued can be no greater than the amount of stock issued outright in the merger, plus the amount of any escrowed stock.

Thus, as little as 25% of the total amount of stock which could be issued must be issued outright, an additional 25% can be issued into escrow and the remaining 50% can be contingent stock.

Contingent stock is treated as issued only when the right to receive it matures. Therefore, the receipt of contingent stock is considered receipt of a deferred payment and a portion of the stock is not received tax-free, but is recharacterized as interest income under the imputed interest or original issue discount rules.

© 2005