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New Tax Law Guarantees More Barter (Stock Transactions)

Contrary to what's reported in the business press, most corporate mergers (numerically speaking) in the U.S. are quite small...involving deals valued between $500,000 and $2 million.

Under a new tax law, as of December 1999, some business owners will be paying taxes on money they may not have received. In short, the new law requires that taxes on the proceeds from the sale of a business must be paid all at once, even if the funds are to be received in installments over several years.

It's estimated 260,000 businesses a year will be affected, as most firms with less than $50 million in annual revenues rely on an installment arrangement.

The obvious way to avoid the new law is to arrange a stock sale, rather than making an asset sale. The trading of one's stock for another company's equity is now used in 59% of the mergers and acquisitions taking place annually in the U.S.

Although many believe that Congress didn't realize the tax rule would so broadly affect small business, it is expected to be a good revenue generator...bringing in approximately $1.9 billion over five years.

A coalition of 42 groups, including the National Federation of Independent Business and the U.S. Chamber of Commerce, recently wrote Treasury Secretary Lawrence Summers urging him to support efforts to repeal the "onerous" provision. Similar letters were sent to the Senate Finance Committee and House Ways and Means Committee.

If lobbyists don't succeed in reversing the rule, Wall Street may create an alternative, a securitized note, enabling the seller to receive all cash up-front to cover taxes, while the buyer would pay some of the purchase price in cash installments. These payments would be received by the buyers of the securitized paper.