Chapter 10.pptx - Chapter 10 Taxable Mergers Acquisitions...

Unformatted text preview: Chapter 10 Taxable Mergers & Acquisitions Corporate Acquisitions Acquisition of control by one corp over another Asset acquisition Stock acquisition IRC Sec. 338 Certain Stock Purchases Treated as Asset Acquisitions An election to qualified purchasing corporations to treat certain stock acquisitions as assets acquisitions IRC Sec. 338 Cont’d Three basic techniques: a) An asset acquisition b) A stock acquisition without a §338 election c) A stock acquisition treated as an asset acquisition pursuant to a §338 election Acquisition Structure Taxable Acquisition vs. Tax-Free Reorganization Taxable acquisition is when the selling corporation & selling shareholder is taxable upon the sale of its assets & upon the sale of his stock respectively Tax-free reorganization is when it fits within a statutory non-recognition provision Taxable Acquisition Substantial continuing proprietary interest Purchasing corporation acquiring target assets or stocks for cash and or notes Purchasing corporation acquiring target assets or stocks in exchange for P’s voting stock Seller recognizes gain or loss Tax-Free Acquisition Target corporation is entitled to non-recognition in an asset acquisition, in exchange for purchasing corporation stocks Target shareholders will not recognize gain or loss in a stock acquisition, in exchange for purchasing corporation stocks Purchasing Corporation Gets cost basis in a taxable asset or stock acquisition Gets transferred basis in a tax-free asset or stock acquisition Stock or Assets? Nontax Factors Willingness to sell Outside restrictions Minimize liability exposure Avoid unwanted assets Tax Factors Immediate taxable gain to selling corp Cost basis to purchasing corp Extent to which assets are depreciable for P Corp Extent of gain/loss to T Corp Stock sale favored Taxable ASSET Acquisitions Target Corp – immediate taxable gain or loss Amount of gain/loss on an asset-by-asset basis Requires residual allocation method Must include liabilities assumed by the purchaser Liquidation distribution is taxable unless to corp parent Taxable ASSET Acquisitions (cont’d) Target corp shareholders will report gain or loss upon liquidating distribution Distribution of P installment notes Purchasing corp gets cost basis; residual allocation method Allocation of the Purchase Price Seller prefers allocation to capital assets Buyer prefers allocation to amortizable & depreciable assets Residual Method Class I – cash Class II – CD, actively traded property Class III – A/R Class IV – Inventory Class V – in between assets Class VI – all §197 intangibles except Class VII assets Class VII – goodwill & going concern value Taxable STOCK Acquistions Target corp shareholders will report gain or loss Target corp has no immediate tax consequences Unused NOL in target corp is now limited per §382 Purchasing corp gets cost basis Target corp retains assets with no change to basis Stock Acquisitions Treated as Asset Acq. Kimbell-Diamond Milling Company v. Commissioner Argument is that since Kimbell intended an asset acquisition, then stock purchase & liquidation is step transaction, Kimbell should get cost basis, i.e. consideration paid Qualifying Stock Purchases §338 is elective Available only in QSP Defined as having the two-part 80% tests Timely election Irrevocable Qualifying Stock Purchases (cont’d) Types of non-qualified QSP Target corporation recognizes gain or loss Purchasing corp receives assets on a cost basis Deemed Sale & Repurchase §338(a)(1) – the target is treated as if it sold all its assets at the close of acquisition date at FMV in a single transaction; sale triggers gain/loss recognition §338(a)(2) – the target is treated as a new corporation, which purchased all of the assets on the following day Deemed Sale & Repurchase (cont’d) New target will not have any E&P, NOL or other tax attributes Target corporation shall not be treated as a member of an affiliated group Mechanics of Deemed Sale FMV per §338 = grossed-up aggregate deemed sales price (ADSP) ADSP = Amount realized by the target shareholders on the sale of stock to purchasing corp Includes target’s liabilities including recapture Mechanics of Deemed Repurchase Cost basis = the sum of the grossed-up basis of the purchasing corporation’s recently purchased stock and the basis of the purchasing corporation’s nonrecently purchased stock Grossed-up basis = Stock cost basis for the 12mos x (100% - % of old stock) % of QPS QSP w/o §338 Election Yoc Heating Corp. v. Commissioner IRS argues substituted basis; Yoc argues cost Anti-Yoc Heating regulatons – apply only if target assets are transferred following a QSP for which a §338 election was not made Bifurcates – tax-free reorg but taxable acq. Minorities Whether to Make the §338 Election Compare with election cost of deemed sale tax on gain/loss to without election lost depreciation writeoffs Other Issues Anti-cascading rule §338(h)(10) Election Consistency Rules – Asset and Stock consistencies ...
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