When Are Corporate Acquisitions & Divestitures Taxable vs. Tax-Free?

An intro to the potential tax liabilities of a reorganization

By Super Lawyers staff | Reviewed by Canaan Suitt, J.D. | Last updated on January 17, 2024

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Mergers, acquisitions, and divestitures all result in a significant change or restructuring of one or more businesses. These types of business decisions can have significant tax implications. What exactly those tax consequences will be depends entirely on the specific nature of the transaction—with the most important factor being how the selling shareholders are compensated for giving up their stock ownership in a business.

In this article, you will find an overview of the key things to know about corporate acquisitions/divestitures and taxation. 

The Tax Implications of Corporate Acquisitions and Divestitures

Before your business acquires or divests from another business, it is crucial that you consider the full ramifications of the transaction—including the potential tax consequences. How the transaction is structured will have an impact on taxes, particularly for the party making a sale.

Here is a basic overview of the key things to know about tax treatment of corporate acquisitions and corporate divestitures in North Carolina.

1. Taxes and Corporate Acquisitions

A corporate acquisition occurs when one company purchases most (or all) the shares of another target company. In doing so, the acquiring corporation gains control of the other business.

Generally speaking, a corporate acquisition is either taxable or tax-deferred. The key factor is how the acquisition was made. When a business is acquired through a cash purchase, that is a taxable event for the shareholders of the target corporation. A gain or loss must be recognized.

However, a stock purchase is generally tax-deferred. Under the Internal Revenue Code (IRC §1032(a)), a stock-for-stock exchange is a non-taxable event for the business and stockholders.

2. Taxes and Corporate Divestitures

A corporate divestiture occurs when one company gets out of its ownership position in another company—either through a sale, an exchange, or some other type of business maneuver.

The selling company will receive some form of consideration in exchange for divesting. Whether or not a divestiture is taxable depends largely on the remuneration. When cash is paid out, a corporation—and its individual shareholders—generally need to recognize the gain or the loss. It is a taxable event.

However, a divestiture is typically not a taxable event if the selling company receives stock/securities through spinoff, equity carve-out, or subsidiary stock sale.

Specific Circumstances Matter for Tax Purposes— A Professional Can Help

State and federal tax regulations are extraordinarily complex—especially when corporate acquisitions or corporate divestitures are involved. The tax implications of a business transaction should always be considered. There may be tax issues both for the corporation itself and for the individual shareholders.

A corporate tax lawyer will ensure that you and your business partners have a full understanding of the consequences of any proposed mergers and acquisitions, or divestiture before the transaction is finalized.

If you have any questions about the taxation of corporate acquisitions and divestitures, read our tax law overview or consider contacting an experienced North Carolina tax attorney

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