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Double-tax dilemma • QSBS 1202/1045 • 338 elections • Personal goodwill • 368 reorgs • Pre-sale gifting • GRATs • SALT nonconformity

Strategic Tax Architecture for C Corporation Exits — mergers, acquisitions, and advanced planning (2025)

C corporations sit at the center of modern venture and private equity exits: they carry the burden of double taxation, but they also unlock the single most powerful founder exclusion in the code—Section 1202 Qualified Small Business Stock (QSBS). This guide maps the tax mechanics that govern exits and the planning strategies that can convert a “default” taxable sale into a structurally optimized outcome. :contentReference[oaicite:0]{index=0}

Jump to contents 2025 exit playbook

Educational overview only — not legal/tax advice.

Contents

  1. The C corp paradox: double tax vs QSBS
  2. Asset sale vs stock sale: the core M&A tension
  3. Section 1202 QSBS: the primary exclusion mechanism
  4. QSBS mechanics: $50M gross assets, $10M/10x caps, active business tests
  5. Anti-churning: redemption blackout periods
  6. Section 1045 rollovers: deferral + holding-period tacking
  7. Deal structuring: 338(h)(10), 338(g), and gross-ups
  8. Personal goodwill: escaping double tax (when facts support it)
  9. Tax-free reorganizations (368): A/B/C and triangular mergers
  10. Pre-transaction planning: charity timing, GRATs, QSBS trust stacking
  11. SALT: QSBS nonconformity + NING/DING crackdowns
  12. 2025 exit playbook

1) The C corp paradox: double tax vs QSBS

The report frames C corps as paradoxical: they alone face the classic double-tax regime, yet they alone unlock QSBS (Section 1202), which can reduce federal tax on a qualifying exit to effectively zero on eligible gains. The TCJA’s 21% corporate rate changed the math, but it didn’t eliminate the structural wedge in deal negotiations. :contentReference[oaicite:2]{index=2}

2) Asset sale vs stock sale: the core M&A tension

The central negotiation problem is misalignment: buyers prefer asset deals because a basis step-up creates future depreciation/amortization shields; sellers prefer stock deals to avoid entity-level tax. In a C corp asset sale, gain is taxed at the corporate level and again when proceeds are distributed—often producing a combined effective rate that can exceed 50% once state taxes are added. :contentReference[oaicite:3]{index=3}

Why “step-up” matters

Buyers value post-close deductions: tangible asset depreciation and goodwill amortization (15 years for Section 197 intangibles) can materially increase after-tax cash flow and justify paying more—especially when a gross-up is modeled efficiently. :contentReference[oaicite:4]{index=4}

3) Section 1202 QSBS: the primary exclusion mechanism

QSBS is the cornerstone. The report outlines the “vintage” regime (50% / 75% / 100% exclusions based on issuance date) and emphasizes that the modern 100% exclusion era (post-September 27, 2010 issuances) eliminates the AMT preference item for excluded gain—making federal tax on eligible QSBS gains effectively 0%. :contentReference[oaicite:5]{index=5}

4) QSBS mechanics that decide eligibility

The report highlights the gating requirements: the $50M “gross assets” test (based on tax basis, not FMV), the greater-of $10M or 10x basis exclusion cap, the 80% active business asset test, and the excluded service-business categories (health/law/consulting, and “reputation or skill” businesses). It also details the working-capital safe harbor that allows startups to hold cash for anticipated needs without failing the active business test. :contentReference[oaicite:6]{index=6}

“Basis stuffing” (when appropriate)

Because “gross assets” is a basis concept, companies can grow dramatically in value while staying below $50M in adjusted basis—creating counterintuitive QSBS eligibility. :contentReference[oaicite:7]{index=7}

10x basis cap planning

The 10x rule can dwarf the $10M cap when a founder/investor has meaningful basis—creating planning opportunity but requiring careful structuring and substantiation. :contentReference[oaicite:8]{index=8}

5) Anti-churning: the redemption blackout period

The report emphasizes QSBS “anti-churning” rules designed to prevent clock resets and engineered QSBS issuance around redemptions. Related-party redemptions and significant buybacks around issuance can taint QSBS, creating a high-stakes “blackout” window around financings and cap table cleanups. :contentReference[oaicite:9]{index=9}

6) Section 1045 rollovers: deferral + holding-period tacking

When an exit happens before the 5-year QSBS holding period, Section 1045 offers deferral if proceeds are reinvested into replacement QSBS within 60 days. The report highlights that the holding period “tacks,” but the deadline is strict. It also describes the “Newco shell” approach—capitalizing a new eligible C corp and deploying capital into active business operations to maintain eligibility (parking cash indefinitely is a risk). :contentReference[oaicite:10]{index=10}

7) Deal structuring: 338(h)(10), 338(g), and gross-ups

The report explains 338(h)(10) as the buyer/seller compromise—legally a stock sale, but treated as an asset sale for tax—available for S corps or consolidated C-corp subsidiaries (not for standalone individual-owned C corps). It also explains why 338(g) is often a “trap” for domestic standalone C corps: the target pays the tax up front, and the buyer effectively bears that cost to receive deductions over time—frequently negative NPV absent large NOLs. :contentReference[oaicite:11]{index=11}

Gross-up economics

Where a step-up creates material tax shields, buyers may pay a gross-up so the seller is indifferent vs a stock sale. The report notes the gross-up is iterative because the gross-up payment itself becomes taxable consideration. :contentReference[oaicite:12]{index=12}

8) Personal goodwill: bifurcating value to escape double tax

For standalone C corp asset deals, personal goodwill can be a powerful mitigation strategy when facts support it. Under Martin Ice Cream and related cases, goodwill may be personally owned if it’s tied to the founder’s relationships/reputation and not contractually assigned to the corporation. The report flags “bad facts” that can kill the strategy—especially pre-existing employment/non-compete agreements that transfer goodwill to the company. :contentReference[oaicite:13]{index=13}

9) Tax-free reorganizations (368): A/B/C and triangular mergers

When consideration includes acquirer stock (common in public-company deals), Section 368 can provide tax-free treatment for the stock portion. The report summarizes A/B/C reorganizations and forward/reverse triangular mergers, and it explains boot taxation using the “post-reorganization redemption” framework from Commissioner v. Clark—where boot is often treated as capital gain due to massive dilution in small-target/large-acquirer deals. :contentReference[oaicite:14]{index=14}

QSBS interaction in reorgs

QSBS treatment can “freeze” in reorganizations: built-in gain at closing can remain eligible, but future appreciation in non-QSBS replacement stock becomes regular capital gain. :contentReference[oaicite:15]{index=15}

10) Pre-transaction planning: gifts, GRATs, and QSBS trust stacking

The report stresses that the “pre-LOI” window is where value transfer is possible. It highlights the assignment-of-income trap (including Hoensheid) for charitable gifts made after a deal is effectively inevitable. It then lays out high-leverage tools: GRATs for shifting pre-IPO growth (leveraging the 7520 rate) and QSBS stacking by gifting shares to properly structured non-grantor trusts—each potentially a separate $10M taxpayer, subject to multiple-trust anti-abuse rules. :contentReference[oaicite:16]{index=16}

11) SALT: QSBS nonconformity + NING/DING crackdowns

State taxes can be the largest “silent” drag on QSBS exits. The report provides a state conformity snapshot: some states follow federal QSBS while others (notably California) do not, creating “phantom tax” where federal liability is 0% but state liability is substantial. It also discusses the rise-and-fall of NING/DING structures and highlights legislative crackdowns (including California’s treatment of INGs) that reduce viability for the highest-tax states. :contentReference[oaicite:17]{index=17}

2025 exit playbook

  • • Audit QSBS eligibility early (entity, assets, excluded services, redemptions). :contentReference[oaicite:18]{index=18}
  • • Calendar the QSBS “blackout” windows before financings and buybacks. :contentReference[oaicite:19]{index=19}
  • • If sub-5-year exit risk exists, pre-plan 1045 reinvestment pathways and deadlines. :contentReference[oaicite:20]{index=20}
  • • Model asset vs stock economics, including step-up value and seller double tax. :contentReference[oaicite:21]{index=21}
  • • Explore personal goodwill only when facts are clean (no pre-existing non-competes). :contentReference[oaicite:22]{index=22}
  • • For stock+cash deals, evaluate 368 options and the taxation of boot. :contentReference[oaicite:23]{index=23}
  • • Execute gifts/DAF/CRT/GRAT moves before the deal is “inevitable” under assignment-of-income risk. :contentReference[oaicite:24]{index=24}
  • • Run SALT planning separately: QSBS nonconformity, residency, and trust viability are state-dependent. :contentReference[oaicite:25]{index=25}
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