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A type of merger or acquisition under Section 368 of the Internal Revenue Code in which the acquiring company's stock received in exchange for the target company's shares is tax-free until sold. This means the stock consideration paid to buy the shares must meet the "continuity of interest" requirements, which specify the minimum percentage of the acquiring corporation's stock needed to buy the target's shares (usually 40%) compared to the percentage of any cash consideration used. Issues can arise with the timing of the stock valuation. Under recent IRS regulations, the valuation should be done on the business day before the deal is signed.
For details on the tax treatment of stock options, restricted stock, and company shares in these transactions, see the FAQs in the section M&A: Taxes.
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