Bipartisan bill would change tax treatment of certain mergers

Bipartisan bill would change tax treatment of certain mergers

Certain mergers would be treated differently for tax purposes if a bill introduced Thursday by Sens. JD Vance (R-OH) and Sheldon Whitehouse (D-RI) becomes law.

The Stop Subsidizing Giant Mergers Act would end tax-free mergers and taxpayer subsidies for acquisitions involving firms that had combined average annual gross receipts of more than $500 million during the previous three years. Exceptions would be made for mergers involving small businesses and for corporations that would be negatively affected during a “purely internal reorganization.”

The legislation “would remove a cornerstone of the corporate tax code and potentially reshape dealmaking,” the Wall Street Journal reported. 

When one corporation is sold to or merges with another, the acquiring firm typically pays tax on the appreciated gain of stocks and/or assets held by the target firm. The tax code, according to Vance, contains a “major exception” for certain types of mergers — that is, if a corporate reorganization is structured so that the acquiring firm is exchanging stock, then the appreciation in value of the target firm’s stock and/or assets may be fully tax exempt. “In other words, neither the corporation nor its shareholders may owe tax on the appreciation in value at the time of sale,” Vance’s press release states. “While the tax is deferred rather than forgiven, in practice the corporation and its shareholders may escape tax forever.”

This tax-free structure is a popular way for corporations to avoid tax responsibilities. Since 2007, up to 40% of the aggregate value of all US mergers have been structured in this way. In 2021, more than half of mergers over $1 billion were tax-free.

“It’s past time to close the unfair loopholes that allow these deals to escape tax liability,” Vance said in a press release. “This commonsense, bipartisan legislation will ensure our nation’s largest corporations are held to a fair standard while preserving protections for small businesses to grow.”

The proposed legislation comes at a time when senior living and care mergers and acquisitions activity is on the rise. According to a report in February from accounting and consulting firm CliftonLarsonAllen, mergers and acquisitions activity in long-term care faltered in 2023 for various economic reasons, but the experts are optimistic that a rebound is coming this year.

“Record numbers of giant corporate mergers have created an anti-competitive economic landscape. The families who get stuck paying higher prices as a result of these mega-mergers should not also have to foot the tax bill for them,” Whitehouse stated. “Our bipartisan bill will end a massive tax giveaway for giant corporate mergers and get our government out of the business of subsidizing corporate consolidation.”