Merger Results in Expensive Tax Liability

Client

A successful closely-held corporation owned by the senior family member.

Challenge

Prior to consulting with Schwartz Cooper, the client had merged his wholly-owned Illinois C corporation into a Delaware limited liability company to facilitate gifts to family members. After the merger, the client discovered that the transaction would result in an aggregate federal tax liability to the corporation and to himself of $600,000-$700,000 because a merger of this type is usually treated as though the assets were distributed to shareholders in complete liquidation, with resulting tax consequences.

Schwartz Cooper Solution

Since the merger could not be “undone,” Schwartz Cooper advised that the best way to eliminate the anticipated tax burden was for the new limited liability company to make an election under the tax laws to be taxed as a corporation. By electing corporate status, both entities would be able to avail themselves of the tax-free reorganization provisions of the tax code, and the merger would be cast as a transaction between two corporations for federal income tax purposes.

Results

By casting the merger as a tax-free reorganization under the tax code, and not as a liquidating distribution that triggers gain, the client owed no tax and avoided a staggering financial hit.