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Comment by michael_miller | Hacker News Reader

The article raises an interesting question on tax practices regarding aqui-hires. If the IRS does decide that such gains should be treated as ordinary income, will investors still be able to "save face" when, legally speaking, they can't even call it an acquisition?

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I'm a bit ignorant into corporate law and taxes, but if one legal entity bought another legal entity for reasonable value, how is the sale of the company not capital gains to the previous owners? Unless the buying company vastly overpaid for the acquired company, I'm not sure what the IRS could do about this.

#edited to fix grammatical errors.

I assume that last "unless" would be the key: if the acquirer is overpaying for the company, as a way of transmuting what's really a hiring bonus into a capital gain, that could be problematic. But it seems like it'd require actually showing that there was overpayment, which courts tend to not want to get into except in really egregious cases (like politicians overpaying for houses as a way of funneling money somewhere), because of how difficult it is to objectively determine.

This is especially true for software companies where it is difficult to prove what the market value for a company ought to be within an order of magnitude (if not more!). Did Facebook overpay for Instagram?

But if you "overpay" all the investors then it doesn't look like a signing bonus.

In the UK there is a IR35 law which basically says if you are a contractor working for BigCo every day, 5 days a week, for 6 months we will treat you as an employee and tax you accordingly.

It is frequently got around with pretty slim "contracts" and generally the HRMC keep it in their back pocket for rainy days

I suspect the IRS will let an awful lot of acqui-hires go through so that they can pick off the obviously dodgy ones without finding them selves bogged down in masses of law suits with defensible "we really were bought out" and the horror of some bad precendants.

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