Iowa Administrative Code › Agency 701 - Revenue Department › Title III - Sales, Use, and Excise Tax › Chapter 221 - Miscellaneous Nontaxable Transactions › Rule 701-221.1 - Corporate Mergers Which Do Not Involve Taxable Sales of Tangible Personal Property or Services

Current through Register Vol. 47, No. 3, July 24, 2024
If title to or possession of tangible personal property or
				  ownership of services is transferred from one corporation to another pursuant
				  to a statutory merger, the transfer is not a "sale" in which the sales price is
				  subject to tax if all of the following circumstances exist:
(1) the merger is pursuant to statute (for
				example, Iowa Code section
				490.1106
				);
(2) by the terms of that
				statute, the title or possession of property or services transferred passes
				from a merging corporation to a surviving corporation and not for any
				consideration; and
(3)  the merging
				corporation is extinguished and dissolved the moment the merger occurs and, as
				a result of this dissolution, cannot receive any benefit from the merger.
Transactions which are not of the type described above may
				  involve taxable sales. See the following court cases relating to this area:
Nachazel v. Mira Co Mfg.
, 466 N.W.2d 248 (Iowa 1991);
D. Canale & Co v. Celauro
, 765 S.W.2d 736 (Tenn 1989); and
Commissioner of Revenue v. SCA Disposal Services
, 421 N.E.2d
				  766 (Mass 1981).
EXAMPLE A. Nonaffiliated Corporations A and C enter into a
				  voluntary merger agreement governed by Iowa Code section
				  490.1106.
				  A and C are separate and independent, one from the other, and neither is a
				  subsidiary of another corporation. No officer of the one is an officer of the
				  other. A and C voluntarily negotiate an arms-length merger agreement which
				  results in the transfer of A's assets to C and the dissolution of A. In return,
				  A's stockholders receive stock in C. The sales price of A's transfer of
				  tangible personal property to merged company C is not subject to sales or use
				  tax.
EXAMPLE B. Corporations B, D, and E are independent entities.
				  They enter into a merger agreement governed by Iowa Code section
				  490.1106
				  and agree to merge into one surviving corporation which will (after the
				  dissolution of B and D) be E. They agree that the shares of merging
				  corporations will be converted into shares of E on an equal basis. The sales
				  price of the transfers of property by the corporations which are parties to the
				  merger are not sales subject to Iowa tax.
EXAMPLE C. Corporation F receives all of Corporation G's
				  outstanding shares from G's sole stockholder. In return, G's sole stockholder
				  receives stock from F. After the transaction, Corporation G continues to exist
				  as a subsidiary of Corporation F. This particular transaction involves a trade
				  or barter of the stock shares of F and G. There is a barter of the stocks and
				  thus a "sale" as that term is understood for the purposes of Iowa sales tax
				  law. However, because the sale involves only intangible property (the stock
				  shares), that sale is not taxable. The stock exchange transaction would not
				  prevent taxation of subsequent transfers of tangible personal property or
				  services between F and G.
EXAMPLE D. Corporation H buys all the assets of Corporation
				  I, which include machinery, equipment, finished goods, and raw materials.
				  Corporation H pays cash for these assets. This transaction does involve the
				  sale of tangible personal property, and the sales price of the sale may be
				  subject to Iowa sales tax. However, reference 701-subrule 18.28(2) concerning a
				  casual sale exemption applicable to the liquidation of a business.
This rule is intended to implement Iowa Code section
				  423.1(46).