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Financial Services Firms: Governance, Regulations, Valuations, Mergers, and Acquisitions, 3rd Edition by Zabihollah Rezaee

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Chapter Nine

Valuations for Tax and Accounting Purposes

Various tax and accounting requirements drive the need for valuations. Valuations can provide both a basis for depreciation or amortization and a means to revalue the balance sheet for purchase accounting transactions. This chapter addresses the pertinent tax and accounting aspects of mergers and acquisitions (M&A) and the role valuation can play.

Tax Aspects of Mergers and Acquisitions

This section discusses the income tax effects of the business combinations. In a business combination, the structure and accounting for M&A are affected by income tax considerations. The structure and types of business combinations determine the accounting method and income taxes that should be used. A merger or acquisition will be either a taxable or a nontaxable transaction. In a nontaxable transaction, the seller receives payment in a form that will not result in taxes paid on any gain realized. In a taxable transaction, the seller is liable for tax on the gain. Valuations can be an important part of either transaction type. Before addressing the valuation issues, it is useful to describe some of the basic characteristics of nontaxable and taxable transactions. This discussion is not intended to provide a comprehensive examination of the tax attributes of various transactions. It is an overview of the basic tax nature of bank M&A transactions.

Nontaxable Transactions

A common type of nontaxable transaction is the Type A reorganization (called ...

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