A proposed bill aimed at ending tax-free reorganizations for large corporations could have unintended consequences for a broad range of mid-market deals and create uncertainty for transactions already underway, according to a deal attorney.
The Stop Subsidizing Giant Mergers Act (S. 4185), introduced March 25 by Senators Sheldon Whitehouse (D-RI) and Josh Hawley (R-MO), would make certain corporate reorganizations taxable events.
How the Bill Would Change Current Tax Law
Under current law, corporations can often structure acquisitions and reorganizations to be tax-free. IRC § 368 allows for nonrecognition of gain or loss in qualifying reorganizations, such as statutory mergers or stock-for-assets acquisitions. Similarly, IRC § 351 allows for tax-free transfers of property to a corporation in exchange for stock if the transferors are in control of the corporation immediately after.
The proposed legislation would amend both sections. It would deny tax-free treatment for reorganizations under IRC § 368 and for certain property transfers under IRC § 351 if the combined average annual gross receipts of the involved corporations for the three-year period preceding the transaction exceed $500 million.
The bill includes exceptions for certain internal restructurings and for smaller businesses. The new limitation would not apply if one corporation controls the other before and after the transaction, if a single corporation controls both parties involved, or if one of the parties meets the small business gross receipts test under IRC § 448(c)(1).
Taxes an Important Factor, But Not the Sole Driver
While the bill’s sponsors framed it as a way to stop corporations from using tax breaks to fuel consolidation, Michelle Heisner, a shareholder and deal attorney at Baker Donelson, told Checkpoint that tax considerations are a component of a deal’s structure, not the primary motivation.
“In my experience, people aren’t doing deals for the taxes,” Heisner said, explaining that deals are driven instead by economic desire, a need for liquidity, and a belief that combining companies will create synergy.
Tax treatment is a “mathematical element that goes into the decision,” she explained, affecting the economics and feasibility of a transaction’s structure. The fundamental business and economic rationale, however, is what drives a deal forward.
The philosophy behind existing tax law, Heisner noted, is that the “realization event should follow the liquidity.” In a typical tax-free reorganization, sellers receive stock instead of cash, meaning they don’t have liquid assets to pay a large tax bill at year’s end. Forcing a tax event without providing cash could compel sellers to liquidate equity just to cover taxes, which runs counter to the current structure.
Broad Reach
Heisner also argued that the bill’s effects extend well beyond what its name implies. The proposed legislation uses a $500 million combined revenue threshold, applied to the revenues of the parties involved, not to the size of the deal itself, to define which transactions no longer qualify for tax-free treatment.
“This bill actually touches far more than what I would traditionally consider to be a giant merger,” she said, adding that it “would likely impact a lot of things in big market M&A that we don’t consider to be giant mergers.”
Heisner noted that the impact could be felt acutely in the mid-market, where sellers, such as company founders and employees, may be more sensitive to tax implications than stockholders in large public companies, who might hold stock in tax-deferred accounts.
She offered several examples of transactions that could be unintentionally affected. Two large companies could form a small joint venture, but the transaction could be subject to the new tax if the parent companies’ combined revenues exceed the threshold. The rule could also apply to pro-competitive divestitures or to acquisitions involving fast-growing technology companies that quickly scale their revenue, even if the deal itself is not “giant” in size or scope.
“It doesn’t look at the size of the deal itself, and it also doesn’t look at the competitive effects of the deal,” she said.
Risk for Deals Caught in Transitional Period
For now, Heisner said the bill has not prompted deal practitioners to change how they structure transactions, noting it is “not at a place where I think it’s really gotten the attention of something that is likely to be passed in the near term.”
That could change if the bill gained momentum. Because the bill is slated to take effect on the date of enactment, deals signed before but closing after passage could face significant complications. Heisner warned of a “worst case scenario” where the economics of a signed deal change overnight, forcing parties back to the negotiating table or causing the transaction to fail.
“You could then have sellers who essentially want to rethink the deal and are looking through their agreements, trying to find ways to force the buyer to the table to renegotiate,” she said.
This is particularly concerning because deals can take a year or longer to close due to regulatory reviews, antitrust clearances, or other complexities. Without a transitional or phase-in period, the bill could create extended uncertainty. A deal structured based on the Tax Code as it existed at signing could become unviable if a new tax liability is introduced before closing, especially if the transaction does not include enough cash for sellers to cover the unexpected tax bill.
According to Heisner, including a transitional period in the legislation could resolve this uncertainty. For example, the law could apply only to deals signed after the date of enactment, protecting transactions already in progress. Heisner said such a provision “would solve a lot of this sort of uncertainty,” noting that without it, parties do not know the true economics of their deal.
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