Asset versus stock acquisitions
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Asset versus Stock Acquisitions. Nontax issues Known and potential liabilities of target corporation Rights and benefits associated with target’s legal entity Negotiation with target management vs. target shareholders. Taxable Asset Acquisitions. Two options:

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Asset versus stock acquisitions
Asset versus Stock Acquisitions

  • Nontax issues

    • Known and potential liabilities of target corporation

    • Rights and benefits associated with target’s legal entity

      • Negotiation with target management vs. target shareholders


Taxable asset acquisitions
Taxable Asset Acquisitions

  • Two options:

    • Direct asset purchase without liquidation of target

    • Direct asset purchase with liquidation of target or merger

  • Recall tax consequences:

    • Target recognizes gain/loss on sale of assets

    • If acquisition is a merger or target liquidates, target shareholders recognize gain/loss on disposition of their target stock

    • Acquiring corporation takes a tax basis in targets assets equal to their purchase price


Taxable stock acquisitions
Taxable Stock Acquisitions

  • Tax consequences without Sec. 338 election:

    • Target recognizes no gain/loss

      • Tax basis of target assets is not affected (no step-up or step-down to FMV)

    • Target shareholders recognize gain/loss on disposition of their target stock

    • Acquiring corporation takes a tax basis in target stock equal to purchase price


Taxable stock acquisitions continued
Taxable Stock Acquisitions continued

  • Tax consequences with Sec. 338 election:

    • Target recognizes gain/loss as though its assets were sold for ‘aggregate deemed sale price’

      • Tax basis of target assets is stepped-up or down to aggregate deemed sale price

      • Aggregate deemed sale price = price paid for stock + target’s liabilities assumed + tax on basis step-up or step-down

    • Target shareholders recognize gain/loss on disposition of their stock

    • Acquiring corporation takes a tax basis in target stock equal to purchase price


Example taxable acquisition alternatives
Example: Taxable Acquisition Alternatives

  • Acquiring corporation (A) wishes to purchase the assets of target corporation (T) for $500,000 cash or will pay a price for the stock of T that provides equivalent value to T’s shareholders

  • T’s assets have a tax basis of $100,000

  • T’s shareholders have $150,000 of tax basis in their T stock and have owned it longer than 1 year

  • T has no liabilities and no NOL, capital loss, or tax credit carryforwards


Example continued
Example continued

  • What are the tax consequences of the acquisition to T, A, and T’s shareholders under the 4 taxable acquisition alternatives?

  • Suppose that T owns the following assets:

    • Inventory with a tax basis of $50,000 and a FMV of $120,000

    • Personal property with a tax basis of $50,000 and a FMV of $80,000 (MACRS life of 5 years)

  • What future tax benefits would A receive by stepping up the basis of T’s assets?


Example continued1
Example continued

  • Suppose that the future tax benefits of the step up are worth $95,000

  • Which acquisition alternative would A prefer? Why?

  • Would A’s preferences change if T had expiring capital loss carry forwards of $150,000? What are the tax consequences of each alternative to A, T, and T’s shareholders in this case?


Example continued2
Example continued

  • Refer back to the original scenario, with no capital loss carry forward. At what price for an asset purchase is A indifferent between an asset purchase and a stock purchase without a Sec. 338 election?

    • At this price, which option do T’s shareholders prefer?


Strategic issues
Strategic Issues

  • Determination of final price is the result of negotiations that often ‘split’ tax costs and benefits

    • Acquirer should consider tax consequences of alternative transaction forms to the seller in determining a competitive offer

    • Choice is often between taxable and nontaxable forms as well as between asset and stock acquisitions


Practical issues
Practical Issues

  • How would the acquirer estimate the tax basis of a potential target’s assets, and its other tax attributes, to determine whether an asset or stock purchase is desirable and determine a competitive price?

  • How would the acquirer determine the tax status of the target’s shareholders?

  • How would the future tax benefits of a basis step up be determined?


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