Mergers & Acquisitions 2022 Annual Review

2022 M&A ANNUAL REVIEW Alternative Minimum Tax on Large Corporations The IRA imposes a new 15% minimum tax on certain large corporations, effective for tax years beginning after December 31, 2022. Specifically, the corporate alternative minimum tax (“Minimum Tax”) generally applies to U.S. corporations (other than RICs, REITs, and S corporations) that have average annual “adjusted financial statement income” (AFSI) in excess of $1 billion over a rolling three-year test period. A corporation’s AFSI is the net income or loss reported on its applicable financial statement (AFS, generally prepared under U.S. GAAP or IFRS standards), adjusted in various ways. The potential 15% minimum tax is reduced by the amount of regular corporate income tax and “base erosion and anti-abuse tax” otherwise payable by the corporation for such tax year. Special rules apply for U.S. corporations owned by non-U.S. parent companies. Once a corporation has become subject to the Minimum Tax, there is no clear path for that corporation to cease being subject to the tax in subsequent years, absent an exercise of Treasury discretion. Treasury has provided initial guidance of interest to M&A dealmakers: ■ Notice 2023-7 effectively exempts from the Minimum Tax many typical M&A structures that qualify for tax deferral, including acquisitive reorganizations, spin-offs and split-offs, holding company formations, and partnership contributions. Under the Notice, any financial accounting income associated with such a transaction is excluded from the Minimum Tax base. Conforming adjustments are made to the basis of the assets for financial accounting purposes (generally preserving the deferred gain for both accounting and tax purposes, potentially to be recognized upon a later transaction). ■ The relief provided by the Notice is limited. For example, the Notice only exempts transactions in which no gain or loss is recognized for tax purposes. In addition, it appears the Notice’s “tax trumps financial accounting” approach to nonrecognition transactions might be limited to corporations that are direct parties to the transaction (and not, for example, a corporation that might be affected in its capacity as a shareholder in a corporate party to the transaction). Treasury has indicated that it will provide additional guidance on these and other provisions of the IRA during 2023. The excise tax on corporate stock buybacks goes well beyond conventional share buybacks and must be considered in many common M&A transactions involving public companies.