Taxing the Publicly Traded Stock in a Corporate Acquisition

Abstract:     
The proposal would treat publicly traded stock received by target shareholders in an acquisitive reorganization as boot. Because target shareholders drop by more than 20 percent, the gain would be taxable as capital gain. Publicly traded partnership interests would be treated the same. There would be no gain or loss at the corporate level, however, even if the target corporations acted as a conduit to shareholders. Shareholders would not be taxed under this proposal if their corporation issues new stock, even if control changes, and if existing shares become publicly marketable.

The proposal is made as a part of the Shelf Project, a collaboration by tax professionals to develop and perfect proposals to help Congress when it needs to raise revenue. Shelf Project proposals are intended to raise revenue without raising tax rates, defend the tax base, and improve the rationality and efficiency of the tax system. Given the calls for economic stimulus, some proposals may stay on the shelf for a while. A longer description of the project is found at ‘‘The Shelf Project: Revenue-Raising Proposals That Defend the Tax Base,’’ Tax Notes, Dec. 10, 2007, p. 1077, Doc 2007-22632, or 2007 TNT 238-37.

Shelf Project proposals follow the format of a congressional tax committee report in explaining current law, what is wrong with it, and how to fix it.

Number of Pages in PDF File: 9

Keywords: tax, corporate reorganization, boot

JEL Classification: H20

Accepted Paper Series