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Unformatted text preview: 7-1 Chapter 7 Corporations: Reorganizations (2011 edition) updated: June 1, 2011Learning Objectives: Understand the basic tax consequences arising from corporate reorganizations, including corporate mergers, acquisitions, and divisions. Discuss the tax treatment of the Acquiring corporation, the Target corporation, and the Targets shareholders. Describe the seven different types of reorganizations and the requirements that must be met for nontaxable treatment. Explain the judicial and administrative conditions for a nontaxable reorganization. Explain the rules governing the carryover of tax attributes from one corporation to another. I. Corporate Reorganizations In General A. Taxable and tax-deferred corporate acquisitions when a corporation decides to expand the scope or geographic location of their business by acquiring an existing corporation (as opposed to growing internally), two basic questions must be addressed: 1. Is the Acquiring corporation going to acquire the Target corporations assets or stock? 2. What consideration is going to be used cash, debt or equity (or some combination)? B. There are four basic ways for the transaction to be structured: Taxable asset acquisition Taxable stock acquisition Nontaxable asset acquisition Nontaxable stock acquisition Further complicating the issue often the buyer and seller have different tax objectives. The buyer likely would prefer a taxable transaction in order to get a stepped-up basis in the depreciable assets and the ability to recognize the intangible asset goodwill. Subsequent depreciation and amortization deductions will reduce taxable income. The seller often prefers a nontaxable transaction which allows them to defer the tax into the future. 7-2 C. The term reorganization refers to any tax-free corporate restructuring. To qualify for nonrecognition treatment under Sec. 368 the reorganization must meet certain general requirements: 1. Must have a plan of reorganization and the plan must be adopted by each corporation involved in the reorganization. 2. Must meet certain tests in the Regulations regarding continuity of interest and continuity of business enterprise. 3. Must meet judicial doctrine of having a sound business purpose. 4. Must be conducted according to one of several acceptable patterns (there are seven forms or types of reorganizations). 5. The court-imposed step transaction doctrine shouldnot apply to the reorganization (otherwise tax-free status may be denied). D. There must be a planof reorganization that reflects a restructuring falling under one of the Code sanctified reorganizations. It is specifically required by Secs. 354 and 361....
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This note was uploaded on 09/09/2011 for the course TAX 5015 taught by Professor Kelliher,c during the Spring '08 term at University of Central Florida.
- Spring '08