Under a change in the 2004 Tax Act, a corporation that makes a "taxable" acquisition of another corporation now must file an information report with the Internal Revenue Service and send similar information to the shareholders of the acquired corporation. The report must describe the acquisition and state the amount of money and the value of other property that was transferred to the shareholders.

Although details of the reporting requirement will be provided through formal guidance issued by the IRS in the future, the requirement is in effect for acquisitions made after October 22, 2004.

Companies with acquisitions in the pipeline or with ongoing acquisition programs should keep the following in mind:

	The statutory reporting requirement applies to the acquisition by one corporation of "stock in or property of" another corporation if any shareholder of the other corporation is required to recognize a taxable gain as a result of the acquisition. The requirement thus covers both cash purchases of the stock of another corporation and "tax-free" reorganizations in which some taxable property ("boot" in tax parlance) is given to the shareholders.
	Modest penalties are imposed for good-faith reporting errors, but an "intentional disregard" of the reporting requirement can result in a penalty equal to 10 percent of the consideration given in the transaction that should have been reported but was not.
	Statements to the shareholders of the acquired corporation must be delivered by January 31 of the year following the year of the acquisition. The date for filing the report with the IRS has not yet been specified, but presumably it will be within a similar time frame.

Compliance action items include:

	Acquisition checklists should be revised to assure necessary attention to reporting requirements.
	Reporting dates for taxable acquisitions should be calendared.
	Extra care should be taken in structuring tax-free reorganizations. The acquiring corporation must evaluate the qualification of the transaction for tax-free treatment in order to meet reporting requirements, even if there would be no substantive tax disadvantage to the acquirer from a failed reorganization. An acquiring corporation also should analyze all transactions that surround the reorganization, such as preparatory dividends or property transactions between the acquired corporation and the selling shareholders, to ascertain whether such transactions contain reportable boot.
	The acquiring company's reporting position should be discussed with the shareholders of the acquired corporation before the closing. In some cases, differences of opinion on the reporting of potential boot transfers may cause friction between the parties to the transaction. However, any such issues are better resolved before the closing, especially when the selling shareholders will continue as managers of the acquired business.

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For more information about the issues covered in this report, please contact Michael Weinstein in our New York office at 212-603-6573 or at mweinstein@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.





©2005 Thelen Reid Brown Raysman & Steiner LLP