UCLAOLCT-class7 - Taxation of Corporations Shareholders...

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Elementary and Intermediate Algebra
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Chapter 5 / Exercise 63
Elementary and Intermediate Algebra
Tussy/Gustafson
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Taxation of Corporations & ShareholdersSession 7© Mark S. Hoose1
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Elementary and Intermediate Algebra
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Chapter 5 / Exercise 63
Elementary and Intermediate Algebra
Tussy/Gustafson
Expert Verified
Agenda – Unit 71.Taxable Acquisitionsa.Asset dealsb.Stock dealsc.Sec. 3382.Intro to Acquisitive Tax-Free Reorganizationsa.A Reorgsb.B reorgsc.C reorgsd.Forward & reverse subsidiary mergers2
Overview – M&A1.What can be bought
2.What is the currency?
3.Divisions?4.Attributes?3
Taxable Acquisitions – in GeneralCorp XGenerally – what happens here – someone wants to buy the businessof Corp XUsually, the non-tax buyers are indifferent as to whether they buy the assets or the stock – they just want the business!But of course whether the buyer buys assets or stock has big tax consequencesSo us tax people have to guide them, and explain the consequences of asset versus stock acquisitionsGenerally, due to the double taxation of corporate earnings, the sale of stock is a taxable eventAND, if the corporation itself sold its assets, that is a taxable event, too!Business assets4
Taxable Acquisitions – Seller perspectiveCorp XPut numbers to itMy basis in Corp X stock is $200kCorp X has assets with basis of $150k, FMV of $450k, plus $102k in cashAs the SELLER, what do I want? SELL stockSellers almost always want to sell stock – why?Because then only one level of tax – I pay tax (likely at capital gains rates) on only my gain on the sale of stock (price higher??)Whereas if I sold assets, then there are TWO taxes – one on the corporation on the $300k gain, and another on me when the now-”shell” corporation liquidates and distributes $450k to me ($450k-$200k = $250k sec. 331 gain)Business assets5
But as a buyer, I almost always want to buy assets – why?
Who wins?
6
Taxable Asset Acquisitions – Sec. 1060Corp XWhat if I succeed in buying the assets for $450k?Assets made up ofIPFurniture (7 year life)Equipment (3 year life)People?And they have $150k basis to Corp XIP $0 (why?)Furniture $140kEquipment $10kIssue – allocation of purchase priceSolution – sec. 1060How to allocate? By FMV to “class”Residual is “goodwill” – see sec. 197Business assets7
Taxable Asset Acquisitions – Sec. 197(e)(4)Corp XWhat if I succeed in buying the assets for $450k?

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