Taxation on Sale of PortCo Division
If I'm modeling out the sale of a division for a potential LBO candidate, how would that sale be taxed to RemainCo / the GP? Does the taxation change in the event the proceeds are distributed rather than used to pay down debt? I know gains are traditionally not taxed at the GP level since they are distributed to LP's and taxed there, but not sure how that changes when there is a sale of a division prior to exiting the investment. Appreciate any clarity you all can provide.
This depends on the legal structure of the company you're looking at / what you're selling.
If the parent company is a c-corp and the divestiture is selling assets / a subsidiary out of that corporation, there is double taxation. The parent company will have a gain (essentially the difference between the sale price and the tax basis in the assets / division being sold), plus there is the usual taxation that LPs bear (regardless of whether proceeds go to pay debt or are distributed).
If the structure is all flow-through entities (e.g., the parent company might be an LLC), then there's no double taxation and you can model it the same way you would a typical exit (investors will still owe taxes, but it's a timing issue of whether they owe those taxes when the division is sold or upon exit).
This is very helpful -- thank you!
You generally have a blocker c Corp to avoid ubti for tax exempt lps and foreign lps even if it’s an LLC. I think probably subject to tax..
the reason the ultimate gain on full sale isn’t taxed is bc you sell shares of the blocker itself so tax exempt lps don’t pay cap gains anyway on it. But the division sale imo could create a leakage bc the blocker itself can owe taxes
structuring team could maybe find a workaround but that’s my gut reaction
https://www.lexology.com/library/detail.aspx?g=d199c6b5-8093-42b2-aede-…
edit: on second thought you probably can do some sort of spin of the division and it’s tax free to the lps and then sell that new c Corp. structuring team is smart! I’d just assume no taxes
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