In a prior post, we discussed the impact of the New York sales tax upon the economics and structure of a so-called “M&A” transaction. In this post, we will consider another transfer tax that is often encountered in an M&A deal: New York’s real estate transfer tax.
Why are taxes so important to the sale of a business? Economics. Any deal, whether from the perspective of the seller or of the buyer, is about economics. The deal involves the receipt and transfer of value. The goal of each party is to maximize its economic return on the deal.
Few items will impact the economics of a deal more immediately or more certainly than taxes. The reason is simple: each party to the deal is looking at the structure of the deal in order to maximize its own economic return, and each party will report the deal, in some fashion, on its own tax return. Simply put, the more that a party to the deal pays in taxes as a result of the deal structure, the lower that party’s economic return will be. In the case of a seller, the deal is more expensive if the seller must pay more tax – the seller keeps less of the proceeds from the sale. In the case of a buyer that bears the tax cost, depending upon the asset(s) being acquired, the additional cost may or may not be recoverable through amortization or depreciation (and, then, over varying of periods of time).
Depending upon the deal structure and the assets of the target business, several kinds of taxes may have to be paid and several kinds of returns may have to be filed, thereby making the taxing authorities de facto parties to the deal: they, too, will have an opportunity to review its structure as well as its tax consequences after the relevant tax returns have been filed.
When many practitioners consider the taxes arising out of the purchase and sale of a business, they focus primarily upon federal and, perhaps, state and local income taxes. Often overlooked are state and local transfer taxes, including real property transfer taxes. These transfer taxes, however, can have a significant impact upon the economics of the deal.
Before delving into the real estate transfer tax consequences of M&A transactions, it would be helpful to review some basic deal structures.
The selling corporation sells its business assets to the buyer. The consideration received may be cash, assumption of liabilities, installment notes, other property (including equity in the buyer). The asset sale may also be accomplished by way of a merger of the selling corporation with and into either the buyer or a wholly-owned corporate or LLC subsidiary of the buyer.
Depending upon the composition of the consideration and certain other items, the sale may be taxable or tax-free for income tax purposes.
The shareholders of the target corporation sell their shares of stock in the target to the buyer. If there are many shareholders, or if some of them are recalcitrant, the stock sale may be effected through a “reverse subsidiary merger” (with the buyer’s newly-formed and wholly-owned subsidiary being merged into the target corporation, and the target surviving as a subsidiary of the buyer).
Again, the composition of the consideration can be varied, and will determine whether the transaction is or is not taxable for income tax purposes and, if taxable, when the tax would be owed.
Regardless of the form of the transaction, if the target (or a related entity) owns or leases real property, the transfer tax will have to be considered. Deeds may have to be recorded, mortgages may have to be satisfied, leases may have to be assigned, and consents to such assignments may be required (as in a change-in-control provision). New leases may have to be negotiated and entered into. Other leases may have to be cancelled, either by the owner or by the tenant.
Questions Re Transfer Taxes
In the context of these transaction structures, these questions need to be addressed:
(1) Will the asset sale or stock sale trigger the imposition of the transfer tax?
(2) What other deal-related transactions (see above) will trigger the transfer tax?
(3) Who will be liable for the transfer tax liabilities resulting from these events?
A summary of the relevant transfer tax provisions is in order. This will be covered in the next post.