The closing date of an M&A transaction

Editor: Mo Bell-Jacobs, J.D.

Many accountants have seen a client rush to complete a transaction before the end of a tax year or a client who prefers to wait until the beginning of the next year to close a transaction. There are many tax–related reasons a transaction’s timing may be important.

One reason is the ability to offset deductions or losses against income or gain recognized in the same year. Another is meeting holding–period requirements, such as the requirement to hold property for over one year to characterize gain on its sale as long–term capital gain under Sec. 1222.

Another factor that may make transaction timing important is anticipated changes to tax law. For example, significant Code changes are expected to occur during 2025, given the changed composition of Congress and the presidential administration and the expiration of tax law provisions enacted in the 2017 Tax Cuts and Jobs Act, P.L. 115–97. President Donald Trump has suggested tax law changes including a tax rate reduction and a return to 100% bonus depreciation.

These sorts of transaction timing pressures occur fairly commonly in the contexts of merger–and–acquisition (M&A) transactions and restructurings of a group of related companies. The timing of M&A transactions may be subject to many contingencies and often cannot be controlled by a party to the transaction that seeks a particular tax result.

To attain the desired tax–timing result, the acquisition’s structure and documentation may be altered in a number of ways, and this item addresses some of them. However, this article does not address backdating documents. This item primarily addresses whether tax principles support treatment of an M&A transaction as occurring on a different date than the date on which the relevant documents are actually executed or the date on which legal title to the subject property is transferred. The date on which a transaction takes effect for tax purposes is not elective but hinges on principles of tax law.

Examples

The following two examples both raise the question, “What is the true closing date of the transaction for tax purposes?”

Example 1: A company planned to sell a business line in December of year 1. The closing was delayed, however, because the sale required regulatory approval and the relevant regulatory agency did not approve the sale prior to year end. The parties nonetheless desired to complete the sale before the end of the year and therefore moved ahead with the sale notwithstanding the lack of approval. The purchase agreement provided that a trust controlled by the buyer would purchase the business and that if the sale was not approved, the seller would return the purchase price to the buyer, and ownership over the trust would revert to the seller.

Example 2: A buyer planned to make a significant purchase of tangible personal property eligible for bonus depreciation. The closing was scheduled for December 2024. The buyer, however, hoping that 100% bonus depreciation would be reinstated for purchases beginning in 2025, preferred to delay the transaction until January 2025 to take advantage of the depreciation. The buyer therefore inserted an “effective date” clause in the transaction documents purportedly delaying the transaction’s effective date until January 2025.

Determining the true closing date of these transactions for federal income tax purposes requires consideration of federal tax case law.

Determining the transaction date or tax purposes

In the nontax context, various terms are sometimes used to refer to a transaction date — “closing date,” “effective date,” “acquisition date,” or others. The transaction date may be the date on which the transaction documents are signed or may be later. For tax purposes, the date that determines the transaction’s occurrence depends on various factors.

As in Example 1, this issue can arise when a transaction’s documents specify an effective date but the transaction is not fully completed by that date due to regulatory approvals necessary for completion of the transaction. Sometimes parties seeking to treat a transaction as completed prior to year end may consider executing documents reciting the transaction’s completion prior to year end but containing contingencies whose fulfillment are a prerequisite for the transaction’s legal completion. In many such cases, for income tax purposes, the transaction is treated as not occurring until all contingencies and approvals are met.

It is unnecessary that all transaction consideration be paid by the buyer during the year of the transaction. In addition to the option of providing the seller with a long–term debt instrument rather than cash consideration, a short delay in upfront cash payment need not delay the transaction date. For example, if a transaction has an effective date of Dec. 31 and the transfer of cash does not occur until Jan. 2 solely due to a bank holiday and business closures, then Dec. 31 would typically constitute the transaction date for tax purposes.

Transaction dates and federal income tax case law

In determining the closing date for tax purposes, case law developed over many decades focuses on when the “benefits and burdens” of ownership transfer from one taxpayer to another. That is, on what day did the buyer obtain the economic benefits and burdens of owning the acquired property? Although the transfer of benefits and burdens often occurs on the same day the transaction closes under nontax state law, that is not always the case. Importantly, the transfer of legal title to property is not necessarily determinative.

To determine when the benefits and burdens of ownership pass from one taxpayer to another, courts look to the transaction’s particular facts and circumstances. For example, in Grodt & McKay Realty, Inc., 77 T.C. 1221 (1981), the Tax Court laid out a list of factors and noted that the weight of each factor depends on the surrounding facts and circumstances. Certain factors are more relevant than others, and no single factor is determinative.

Based on the criteria mentioned in the case law, the relevant factors generally include these (among others):

• Will the buyer bear the risk of loss in case of loss or damage to the property?
• Is the buyer paying the property insurance?
• Where the closing is waiting on regulatory approvals, are these approvals merely routine and “ministerial” acts? A ministerial act is a condition that is a mere formality and does not significantly affect the transfer of the benefits and burdens of ownership (see Dally, 227 F.2d 724 (9th Cir. 1955), and Rev. Rul. 98-39). (To illustrate, a regulatory approval such as a premerger notification required to be filed with the Federal Trade Commission typically constitutes more than a mere ministerial act, as the transaction cannot close without this approval. In contrast, the mere “rubber stamping” of a merger certificate under state law is a routine, ministerial act and typically does not preclude the closing of a transaction.)
• Will the buyer be obligated to pay for the property irrespective of any future changes in facts? (For example, if a natural disaster, pandemic, or terrorist attack occurred or an unforeseen lawsuit was brought against the seller that would irreparably reduce the value of the property, would the buyer still be required to pay for the property?)
• Similar to the above factor, would the buyer be required to pay for the property despite an inability to secure bank financing if bank financing necessary for planned payment of transaction consideration fell through?
• Is the buyer entitled to the profits from the ongoing operations of the property?
• Did the buyer obtain the right to possess or use the property?
• Can the buyer control the company it is buying?
• Where the purchase is of stock (or equity) and entitles the buyer to a shareholder (or equity holder) vote, can the buyer vote at this time?
• Was the buyer required to pay some or all of the purchase price?
• Did legal title pass?
• Did the parties treat the transaction as closed for other (nontax) purposes?
• Was the seller required to execute and deliver the property’s deed?

The analysis is holistic and does not depend on any one factor (see Miami National Bank, 67 T.C. 793 (1977)). As one court noted: “There are no hard and fast rules of thumb that can be used in determining, for taxation purposes, when a sale was consummated, and no single factor is controlling; the transaction must be viewed as a whole and in the light of realism and practicality” (Segall, 114 F.2d 706, 709—11 (6th Cir. 1940)).

A transaction may be treated as closed for tax purposes where the only delay (i.e., the only condition subsequent) is a ministerial act. The degree of certainty or uncertainty of future receipt of regulatory approval is relevant where parties agree to move ahead with a transaction and transfer benefits and burdens notwithstanding the fact that requisite regulatory approval remains in process.

Discerning the closing date

The date on which a transaction occurs for tax purposes is not always readily apparent. The transfer of the benefits and burdens of ownership — and not necessarily the date listed in the purchase agreement — determines the transaction’s closing date. A taxpayer should analyze all facts and circumstances regarding the benefits and burdens of ownership during any questionable period to determine the transaction’s true closing date.

Editor

Mo Bell-Jacobs, J.D., is a senior manager with RSM US LLP.

For additional information about these items, contact the author(s) at the email address(es) below.

Contributors are members of or associated with RSM US LLP.

Authors

Joseph Weiner, J.D., LL.M. (Joseph.Wiener@rsmus.com), New York City; and Stefan Gottschalk, CPA, J.D., LL.M. (Stefan.Gottschalk@rsmus.com), Washington, D.C.