TAX ASPECTS OF BUYING OR SELLING A BUSINESS

1. TAX ASPECTS OF BUYING OR SELLING A BUSINESS San Antonio/Houston Presentation: Crawford MoorefieldStrasburger & Price, LLPHouston Office 713.951.5629crawford.moorefield@strasburger.com Dallas Presentation: Jim Browne Strasburger & Price, LLP Dallas Office 214.651.4420 jim.browne@strasburger.com

2. Topics • Transaction considerations • Taxable asset acquisition • Taxable stock acquisition • Tax-free reorganizations • Acquisitions using disregarded entities

3. Topics • Transaction considerations • Taxable asset acquisition • Taxable stock acquisition • Tax-free reorganizations • Acquisitions using disregarded entities

4. Transaction Considerations • Form of transaction • Asset purchase • Stock purchase • Merger • Hybrid – merger by division (TBOC §10.003)

5. Transaction Considerations • Form and timing of consideration • Buyer equity versus cash or other property • Like-kind exchange • Deferred, contingent, or escrowed payments • Employment/consulting agreements and covenants not to compete • Shareholder assets, including goodwill • Purchase price allocation • Etc.

6. Topics • Transaction considerations • Taxable asset acquisition • Taxable stock acquisition • Tax-free reorganizations • Acquisitions using disregarded entities

7. Taxable Asset Acquisition • Purchase of assets Result Transaction Buyer Shareholders Buyer Shareholders Target Shareholders Target Shareholders Cash Target Buyer Target Buyer Assets AcquiredTarget assetsand liabilities Cash;Retained assetsand liabilities

8. Taxable Asset Acquisition • Merger by division Result Transaction Buyer Shareholders Buyer Shareholders Target Shareholders Target Shareholders Cash Target Buyer Target Buyer Merger AcquiredTarget assetsand liabilities Cash;Retained assetsand liabilities

9. Taxable Asset Acquisition • Forward merger Result Transaction Buyer Shareholders Buyer Shareholders Target Shareholders Target Shareholders Cash Target Buyer Cash Buyer Merger Target assetsand liabilities

10. Taxable Asset Acquisition • Forward subsidiary merger Result Transaction Buyer Shareholders Buyer Shareholders Target Shareholders Target Shareholders Cash Target Buyer Cash Buyer Merger Buyer Sub Buyer Sub Target assetsand liabilities

11. Topics • Transaction considerations • Taxable asset acquisition • Taxable stock acquisition • Tax-free reorganizations • Acquisitions using disregarded entities

12. Taxable Stock Acquisition • Purchase of stock Result Transaction Buyer Shareholders Buyer Shareholders Target Shareholders Target Shareholders Cash Target Buyer Cash Buyer Stock Target

13. Taxable Stock Acquisition • Reverse subsidiary merger Result Transaction Buyer Shareholders Buyer Shareholders Target Shareholders Target Shareholders Cash Target Buyer Cash Buyer Merger Buyer Sub Target

14. Taxable Stock Acquisition • Section 338 election Result Deemed Transaction* Target Shareholders Target Shareholders Buyer Shareholders Buyer Shareholders Cash Target Buyer Cash Buyer Cash Assets New Target New Target *Actual transaction is a sale of stock to Buyer, or a reverse subsidiary merger.

15. Topics • Transaction considerations • Taxable asset acquisition • Taxable stock acquisition • Tax-free reorganizations • Acquisitions using disregarded entities

16. Tax-Free Reorganizations • General considerations • Involves only corporations and requires issuance of qualifying consideration (stock) • Tax effects • Generally no entity level taxes • Target Shareholders recognize gain only to extent of non-qualifying consideration (a/k/a “boot”) • Acquiror forgoes FMV tax basis for Target assets

17. Tax-Free Reorganizations • Application • Acquisition of a public company • Public company spin-off • Target shareholders have low stock basis, and Target has high asset basis • Shareholders can limit investment risk with respect to Acquiror stock, or monetize Acquiror stock, using option “collars,” margin loans, and/or other derivatives • Reorganization of consolidated subsidiaries

18. Topics • Transaction considerations • Taxable asset acquisition • Taxable stock acquisition • Tax-free reorganizations • Acquisitions using disregarded entities

19. Summary • Taxable asset acquisition • Preferred form for Buyer (selectivity) • Consider merger by division • Double taxation if C Corporation • Taxable stock acquisition • No buyer step up if C Corporation • Potential deemed asset sale election • Use reverse subsidiary merger

20. Summary • Tax-free reorganizations • Target Shareholders recognize gain only to the extent of boot received • Acquiror foregoes step-up • Consider alternative transactions, including • Horizontal double dummy (allows excess boot) • LLC/partnership Acquiror (no boot limit and buyer gets step-up as and when Seller recognizes gain)