Buckwold12e_ch19_Rev - CHAPTER 19 BUSINESS ACQUISITIONS AND DIVESTITURES TAX-DEFERRED SALES Review Questions 1 While vendors may gain a tax

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CHAPTER 19 BUSINESS ACQUISITIONS AND DIVESTITURES― TAX-DEFERRED SALES Review Questions 1. While vendors may gain a tax advantage by selling a business using a tax-deferred method, they may be subjecting themselves to more risk in terms of ultimately realizing the proceeds from the sale. How is a tax- deferred sale of a business distinguished from a taxable sale? Why does a tax-deferred sale involve greater risk? 2. Give three basic reasons that a vendor may be prepared to accept a greater risk in exchange for a tax deferral on the sale of a business. 3. What four basic methods can be used to achieve a tax-deferred sale? 4. What advantages and disadvantages may arise for the purchaser when the specific business assets are acquired from a vendor corporation and the parties elect transfer prices for tax purposes at amounts that will defer tax to the vendor? 5. What is a share-for-share exchange? How does it differ from a sale of shares in which the vendor and the purchaser elect a specific price for tax purposes? 6. Why is a business acquisition using the share-for-share technique attractive to both the purchaser and the vendor? 7. A tax-deferred sale of a business by a reorganization of share capital may present more risk to the vendor than a sale of its shares to a corporate purchaser and an election of a transfer price for tax purposes. Explain why. 8. When a business owned by a closely held corporation is being sold, the vendor is often persuaded to use tax-deferred methods to structure the sale. What is a closely held corporation? What features may such a corporation have that make a tax-deferred sale attractive? 9. Why may the owner of a business want to transfer a business to children during his or her lifetime, rather than by way of an estate transfer upon death?
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10. What feature is often found when a business is being transferred to a family member? How is the tax-deferred method of sale consistent with this feature? 11. How may the sale of a corporation’s specific business assets to a purchaser with limited resources provide greater flexibility than the sale of shares of the corporation? Solutions to Review Questions R19-1. In order to achieve a deferral of tax on the sale of a business (from either an asset sale or a share sale) the vendor must be prepared to accept all or a specified portion of the payment in the form of shares of the purchaser's corporation or of the vendor corporation. Such shares can be common shares or preferred shares. In other words, the vendor maintains a partial continuing equity interest in the business being sold. In comparison, a taxable sale normally results in the exchange of business assets or shares of the business corporation for assets other than shares. Payment terms from a taxable sale usually include cash and/or the deferred payment of cash secured by notes bearing interest. A tax deferred sale results in a greater risk for the vendor because the
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This note was uploaded on 07/03/2011 for the course BUS 3120 taught by Professor Weedon during the Spring '10 term at University of Winnipeg.

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Buckwold12e_ch19_Rev - CHAPTER 19 BUSINESS ACQUISITIONS AND DIVESTITURES TAX-DEFERRED SALES Review Questions 1 While vendors may gain a tax

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