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Acquisitions by Foreign Corporations




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.


Internal Revenue Code § 367

If Parent is a foreign corporation, then the receipt of Parent stock by Target shareholders, even though incident to a reorganization, will constitute a taxable exchange, unless provided otherwise in regulations.

Under regulations adopted in 1996, a former Target shareholder is entitled to nonrecognition treatment if Target satisfies certain information reporting requirements and

    No more than 50% (by both vote and value) of all of Parent's outstanding stock is received by U.S. transferors in the transaction;

    No more than 50% (by both vote and value) of all of Parent's outstanding stock is owned following the transaction by U.S. persons that were Target officers, directors or 5%-shareholders (i.e., owners of at least 5% by either vote or value of Target's outstanding stock), with Parent stock owned by such persons prior to the transaction being included for purposes of this test;

    Either the U.S. shareholder owns less than 5% (by both vote and value) of the outstanding Parent stock following the transaction or the U.S. shareholder enters into a "gain recognition agreement;" and

    Parent (i) is engaged in an active trade or business outside the U.S., either directly or through certain subsidiaries, during the entire 36-month period ending with the date of the transaction, (ii) has no intent to dispose of such trade or business at the time of the transaction and (iii) has a fair market value at least equal to the fair market value of Target.

In general, each Target shareholder must comply with certain information reporting requirements or incur a penalty of 10% of the value of the shareholder's Target stock, irrespective of whether any gain was recognized in the transaction. Unless the failure to report is due to intentional disregard of the reporting requirement, the maximum penalty is $100,000. Prior to the Taxpayer Relief Act of 1997, the penalty was 25% of the shareholder's gain in the Target stock, with no maximum. However, there are exceptions to the information reporting requirement.

    No information reporting is required if the Target shareholder owns less than 5% (by both vote and value) of the outstanding Parent stock following the transaction and (i) the transaction qualifies for nonrecognition under the rules described above, (ii) the Target shareholder is a tax-exempt entity and the income from the transaction is not unrelated business income or (iii) the Target shareholder properly reports gain recognized in the transaction on a timely filed U.S. federal income tax return.

    Even if the Target shareholder owns 5% or more (by either vote or value) of the outstanding P stock following the transaction, information reporting is not required if (i) the Target shareholder properly enters into a gain recognition agreement, (ii) the Target shareholder is a tax-exempt entity and the income from the transaction is not unrelated business income or (iii) the Target shareholder properly reports gain recognized in the transaction on a timely filed U.S. federal income tax return.

A gain recognition agreement requires the former Target shareholder to file an amended return for the taxable year of the reorganization, reporting the receipt of Acquiring stock as taxable, if prior to the close of the fifth taxable year of the transfer, Acquiring disposes of Target stock or, where Parent stock is received because of the form of the reorganization, Parent disposes of Acquiring stock. A former Target shareholder may elect, under the terms of a gain recognition agreement, to recognize any gain upon Acquiring's disposition of Target stock (or Parent's disposition of Acquiring stock) on the shareholder's income tax return for the taxable year of such disposition. However, such electing shareholder is still subject to interest charges on any additional tax arising from the gain.


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