Assume instead that Tesla acquired all of the stock of SolarCity in exchange
$24.73 in cash per share and did not make a Section 338 election. Assume Tesla
issued bonds to raise the cash necessary to pay for the acquisition. Assume
SolarCity had 100 million shares outstanding
How much tax would the SolarCity shareholders pay in the transaction? Assume for
simplicity that all of the shareholders were taxable individuals facing long-term
capital gains rates (15%) and had a tax basis in the stock of $10 per share.
1. If you were a SolarCity shareholder, would you be better off with this all cash offer or
the actual stock offer? Why?
2. Would this structure affect the tax basis in SolarCity's assets relative to the offer
actually used? If so, by how much?
3. Why do you think that Tesla and SolarCity chose to structure the transaction the way
they did rather than the taxable scenario above?
4. Suppose Tesla and SolarCity went ahead with the taxable acquisition. The next
question is whether Tesla would find it beneficial to make a 338 election with respect
to SolarCity. Assume that the tax basis of SolarCity's assets prior to the election is $5
billion and its liabilities for tax purposes are $4 billion. Assume SolarCity has $400
million of NOLs that can be used to offset any gain from a 338 election. For
simplicity, assume SolarCity's NOLs would have no value absent a 338 election.
Assume that all that assets of SolarCity are in the U.S. Assume any step-up in tax
basis results in additional tax depreciation and amortization using straight line over a
period of 15 years. Assume that Tesla is optimistic about its profitability and thus
expects to face a 35% tax rate immediately after the acquisition and thereafter.
Assume a 10% discount rate.
a. What would be the tax cost of the 338 election?
b. What would be the present value of the tax benefit of such an election?
c. Would Tesla be wise to make a 338 election with respect to SolarCity?
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