7-1 ©2008 Prentice Hall, Inc.. 7-2 ©2008 Prentice Hall, Inc. CORP ACQUISITIONS & REORGANIZATIONS (1 of 2) Taxable acquisition transactions Taxable

7-1©2008 Prentice Hall, Inc.

©2008 Prentice Hall, Inc. 7-2

CORP ACQUISITIONS & CORP ACQUISITIONS & REORGANIZATIONSREORGANIZATIONS (1 of 2)(1 of 2)

Taxable acquisition transactionsTaxable vs. nontaxable acquisitionsTax consequences of

reorganizationsAcquisitive reorganizationsDivisive reorganizations


CORP ACQUISITIONS & CORP ACQUISITIONS & REORGANIZATIONSREORGANIZATIONS (2 of 2)(2 of 2)

Other reorganization transactionsJudicial restrictions on

reorganizationsTax attributesLimitation on use of tax attributesExample Financial statement implications


Taxable Acquisition Taxable Acquisition TransactionsTransactions

Asset acquisitionsStock acquisitions w/ no

liquidationStock acquisitions w/ liquidationStock acquisitions w/ §338

deemed sale electionSee Table C7-1 for a summary


Asset Acquisitions

Direct purchase of assetsTarget corporation

Gain or loss and depreciation recapture are computed by selling (target) corporation on each asset

Acquiring corporationBasis in assets is acquisition cost


Stock Acquisitions with No Liquidation (1 of 2)

How acquisition is accomplishedShareholders of target corp sell their

shares directly to purchaser corpTarget corp recognizes NO gain/lossTarget corp s/hs recognize gain/loss

Payment to a s/h for a noncompete agreement is ordinary income to s/h


Stock Acquisitions with No Liquidation (2 of 2)

Purchaser corp consequencesPurchaser has a new subsidiaryBasis in target stock is acquisition cost

Purchaser’s basis in target’s stock (outside basis) may be > target’s basis in its assets

No adjustment to basis of target’s assetsTax attributes of target transfer to

purchaser


Stock Acquisitions with Liquidation

If parent owns at least 80% of new subsidiary, liquidation is tax-free as described in Chapter 6

Premium paid (amount above target corp’s basis in its assets) is lost upon liquidation of the subsidiary


Stock Acquisitions with §338 Deemed Sale Election

(1 of 4)

How acquisition is accomplishedShareholders of target corp sell their

shares directly to purchaser corpPurchaser files §338 election

pretending that target has been liquidated and a new subsidiary created in its place



(2 of 4)

Target corp recognizes gains & losses on “pretend” sale of assets to itselfSubject to depreciation recapture

Target corp’s basis in its assets are stepped up (or down)Sales price calculated on slide 7-12



(3 of 4)

Target’s old tax attributes wiped outNew elections are made

See Topic Review C7-1 for summary



(4 of 4)

ADSP = G + L - (TR x B) (1 – TR)

ADSP: Adjusted deemed sale priceG: Acquiring’s grossed-up basis in the target

corporation’s recently purchased stockL: Target’s liabilities other other tax liab for saleTR: Applicable federal income tax rate

B: Adjusted basis of asset(s) deemed sold


Taxable vs. Nontaxable Taxable vs. Nontaxable AcquisitionsAcquisitions (1 of 2) (1 of 2)

Use of cash and debt for acquisition produce tax liability

Use of stock and limited cash or debt likely produce nontaxable acquisition

Primary tax impact is on the target (corporation being acquired)

See Topic Reviews C7-2 & C7-3


Taxable vs. Nontaxable Taxable vs. Nontaxable AcquisitionsAcquisitions (2 of 2)(2 of 2)

Only purchase method allowed for GAAP for business combinations initiated after June 30, 2001. FAS No. 141

Goodwill not amortized for GAAPAssets recorded at FMVTested for impairmentFAS No. 142


Tax Consequences of Tax Consequences of ReorganizationsReorganizations

Target corporationAlso referred to as “transferor” corp

Acquiring corporationAlso referred to as “transferee”

corpShareholders & security holders


Target (Transferor) Corporation

No gain/loss on asset transferAssets retain depr recap potentialAssumption of liabilities generally

does not trigger gain recognitionPossible exception for divisive Type D

No gain/loss on distribution of stock and securities as part of reorg plan


Acquiring (Transferee) Corporation

No gain/loss recognized when it receives assets in tax-free reorg

Carryover basis of qualifying propertyGain recognized lesser of gain realized

or FMV of nonqualified property received

Carryover holding period


Shareholders & Security Holders

(1 of 2)

No gain/loss on stock or securities received if exchanged solely for stock or securities as part of reorg planGain recognized lesser of gain realized or

cash plus FMV of other property receivedDividend or capital gain depending on §302

testDividend vs. redemption


Shareholders & Security Holders

(2 of 2)

Basis of stocks & securities received

Adjusted basis in stocks & securities given up

+ Gain recognized on the exchange

- Money & FMV of other property received

= Basis of nonrecognition property received


Acquisitive Acquisitive ReorganizationsReorganizations

Acquiring corp obtains part or all of assets or stock of a target corp

See topic Review C7-5Tax consequencesType A: Merger or consolidationType C: Assets for stockType B: Stock for stock exchangeType D: Asset for stockType G: Bankruptcy


Tax Consequences

Acquiring corporationDoes not recognize gain/loss when it

receives property as part of a tax-free exchange

Acquired property has a carryover basisShareholders & security holders

May have gain to extent “nonqualifying” property received as part of exchange


Type A: Merger or Consolidation (1 of 2)

MergerOne company liquidates

ConsolidationBoth companies liquidate and a new

third company emergesTriangular merger

Acquiring corp uses a controlled subsidiary to acquire target


Type A: Merger or Consolidation (2 of 2)

Reverse triangular mergerAcquiring corp uses a controlled

subsidiary to acquire targetControlled subsidiary merged into

the target corporationTarget corporation becomes a

subsidiary of the parent corporation


Type C: Assets for Stock

Acquiring corp obtains substantially all of target corp’s assets in exchange for acquiring corp’s voting stock and a limited amount of other considerationSubstantially all means 70% of FMV of

gross assets & 90% of FMV of net assetsTarget liquidates itself


Type D: Asset for StockAcquisitive D (1 of 2)

Acquiring corp obtains substantially all of target corp’s assets in exchange for acquiring corp’s voting stock & other considerationSubstantially all means 70% of FMV

of gross assets & 90% of FMV of net assets


Type D: Asset for StockAcquisitive D (2 of 2)

Target or target s/hs must control acquiring corp immediately after asset transferControl defined as either 50% of

voting power of voting stock or 50% of total value of all stock

Target liquidates itself


Type B: Stock for Stock

Acquiring corp issues voting stock directly to target s/hs in exchange for shares of target

Target continues under new ownershipNo other consideration can be used

Except for acquiring fractional shares and payment of certain expenses of target


Type G: Bankruptcy

Part or all of target’s assets transferred to a new corp as part of a court-approved plan in a bankruptcy, receivership or similar situation

Securities of new corporation are distributed in accordance with court-approved plan


Divisive ReorganizationsDivisive Reorganizations

Part of corp’s assets transferred to a second corp which is owned by either the original corp or its s/hs

Divisive D reorganizationsSplit-offSpin-offSplit-up

Divisive G reorganization


Split-off

Corp transfers assets to a controlled subsidiary in exchange for sub’s stock

Sub’s stock then transferred to one or more s/hs in exchange for parent corp stock


Spin-off

Corp transfers assets to subsidiary in exchange for sub’s stock

Parent distributes sub stock to all parent s/hs on a pro rata basis

Parent receives nothing in exchange for distribution of sub’s stock


Split-up

Existing corp transfers all assets to two or more new controlled subs in exchange for sub stock

Parent distributes all stock of each sub to existing s/hs in exchange for all outstanding parent stock and liquidates


Divisive G Reorganization

Existing corp transfers part of assets to a second corporation according to a court-approved plan

Transferor distributes all stock and securities to second corp to s/hs, security holders, and creditors

Transferor corp may continue business or be liquidated by the court


Other Reorganization Other Reorganization TransactionsTransactions (1 of 2) (1 of 2)

Type E: RecapitalizationReshuffling of corporate structure w/in

framework of existing corp” (1942 S.C.)Must have a bona fide business

purpose for reorganizationStock for stock, bonds for stock or

bonds for bonds exchanged as part of a plan


Other Reorganization Other Reorganization TransactionsTransactions (2 of 2)(2 of 2)

Type F: Administrative changeA mere change in identity, form or

state of incorporationAssets and liabilities of old

corporation are transferred to new corporation

All old securities are exchanged for identical new securities


Judicial Restrictions on Judicial Restrictions on ReorganizationsReorganizations (1 of 2)(1 of 2)

If judicial restrictions are not met, reorganization loses its tax-free statusContinuity of proprietary interest

Old owners must continue ownershipContinuity of business enterprise

Old assets must be used in new business


Judicial Restrictions on Judicial Restrictions on ReorganizationsReorganizations (2 of 2) (2 of 2)

Business purposeValid business purpose for

transactionStep transaction doctrine

IRS may collapse series of independent transactions if all part of a plan


Tax AttributesTax Attributes

Tax attributes follow assetsNOLs, capital losses, E&P, gen. bus.

credit, inventory methodsAcquiring corp obtains control of

both assets & attributes in A, C, acquisitive D & G, and F reorgs

Asset ownership does not change in B or E reorgs


Limitation on Use of Tax Limitation on Use of Tax AttributesAttributes (1 of 2) (1 of 2)

§§382 & 269 prevent assets or stock purchases if primary purpose is obtaining loss carryovers

§§382 & 269 also prevent a loss corp from purchasing a profitable corp if primary purpose is using its existing losses


Limitation on Use of Tax Limitation on Use of Tax AttributesAttributes (2 of 2) (2 of 2)

§383 restricts tax credit and capital loss carryovers if §382 appliesRestrictions similar to NOLs

§384 prevents pre-acquisition losses of either acquiring or target corp (loss corp) from offsetting BIG recognized during 5 yrs after acq. by another corp (gain corp).


ExampleExample(1 of 4)(1 of 4)

Thomas Corp transfers all assets and part of its liabilities to Andrews Corp. for $600K of Andrews Common stock. Following the merger, Thomas is liquidatedThomas’ basis in assets $475KLiabilities transferred $100K



What is Thomas’ recognized gain or loss?Gain realized: $700K* - $475K = $225KBoot received: $0Recognized Gain: $0

* $700K = $600K stock + $100K relief of liabilities



What is Andrews’ basis in the assets?$475K (carryover)

How much gain/loss does Thomas recognize upon distribution of Andrews stock to Thomas’ shareholders?No gain or loss



What if Thomas’ basis had been $750K?Recognized loss: $ 0Basis (carryover): $750KDistribution gain or loss: $ 0


Financial Statement Financial Statement Implications Implications (1 of 2)(1 of 2)

SAFS No. 141Acquiring corp may only use

purchase method for financial statement purposes

Deferred tax accounts and treatment of goodwill depend on whether acquisition was taxable or nontaxable


Financial Statement Financial Statement Implications Implications (2 of 2)(2 of 2)

Taxable asset acquisitionNontaxable asset acquisitionStock acquisitionPricing the acquisitionNet operating losses


Taxable Asset Acquisition

Tax basis likely same as book basisNo deferred tax liabilities or

assetsIf tax and book goodwill are equal,

§197 amortization of goodwill creates temporary difference


Nontaxable Asset Acquisition

Book bases differ from carryover tax bases of acquired assetsSFAS No. 109 prescribes that acquiring

corp recognize def tax liability/asset for book/tax bases differences of transferred assets and liabilities

Goodwill not amortizable for taxNo temporary difference


Stock Acquisition

Target corp remains intact as a subsidiary of acquiring corp

Adjustments under SFAS No. 141 & 109 occur when preparing consolidated financial statements

Comments or questions about PowerPoint Slides?Contact Dr. Richard Newmark atUniversity of Northern Colorado’s

Kenneth W. Monfort College of [email protected]

7-50©2008 Prentice Hall, Inc.

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7-1 ©2008 Prentice Hall, Inc.. 7-2 ©2008 Prentice Hall, Inc. CORP ACQUISITIONS & REORGANIZATIONS (1 of 2) Taxable acquisition transactions Taxable