7-1©2008 Prentice Hall, Inc.
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CORP ACQUISITIONS & CORP ACQUISITIONS & REORGANIZATIONSREORGANIZATIONS (1 of 2)(1 of 2)
Taxable acquisition transactionsTaxable vs. nontaxable acquisitionsTax consequences of
reorganizationsAcquisitive reorganizationsDivisive reorganizations
©2008 Prentice Hall, Inc. 7-3
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
©2008 Prentice Hall, Inc. 7-4
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
©2008 Prentice Hall, Inc. 7-5
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
©2008 Prentice Hall, Inc. 7-6
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
©2008 Prentice Hall, Inc. 7-7
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
©2008 Prentice Hall, Inc. 7-8
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
©2008 Prentice Hall, Inc. 7-9
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
©2008 Prentice Hall, Inc. 7-10
Stock Acquisitions with §338 Deemed Sale Election
(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
©2008 Prentice Hall, Inc. 7-11
Stock Acquisitions with §338 Deemed Sale Election
(3 of 4)
Target’s old tax attributes wiped outNew elections are made
See Topic Review C7-1 for summary
©2008 Prentice Hall, Inc. 7-12
Stock Acquisitions with §338 Deemed Sale Election
(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
©2008 Prentice Hall, Inc. 7-13
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
©2008 Prentice Hall, Inc. 7-14
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
©2008 Prentice Hall, Inc. 7-15
Tax Consequences of Tax Consequences of ReorganizationsReorganizations
Target corporationAlso referred to as “transferor” corp
Acquiring corporationAlso referred to as “transferee”
corpShareholders & security holders
©2008 Prentice Hall, Inc. 7-16
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
©2008 Prentice Hall, Inc. 7-17
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
©2008 Prentice Hall, Inc. 7-18
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
©2008 Prentice Hall, Inc. 7-19
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
©2008 Prentice Hall, Inc. 7-20
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
©2008 Prentice Hall, Inc. 7-21
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
©2008 Prentice Hall, Inc. 7-22
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
©2008 Prentice Hall, Inc. 7-23
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
©2008 Prentice Hall, Inc. 7-24
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
©2008 Prentice Hall, Inc. 7-25
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
©2008 Prentice Hall, Inc. 7-26
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
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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
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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
©2008 Prentice Hall, Inc. 7-29
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
©2008 Prentice Hall, Inc. 7-30
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
©2008 Prentice Hall, Inc. 7-31
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
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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
©2008 Prentice Hall, Inc. 7-33
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
©2008 Prentice Hall, Inc. 7-34
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
©2008 Prentice Hall, Inc. 7-35
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
©2008 Prentice Hall, Inc. 7-36
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
©2008 Prentice Hall, Inc. 7-37
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
©2008 Prentice Hall, Inc. 7-38
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
©2008 Prentice Hall, Inc. 7-39
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
©2008 Prentice Hall, Inc. 7-40
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).
©2008 Prentice Hall, Inc. 7-41
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
©2008 Prentice Hall, Inc. 7-42
ExampleExample(2 of 4)(2 of 4)
What is Thomas’ recognized gain or loss?Gain realized: $700K* - $475K = $225KBoot received: $0Recognized Gain: $0
* $700K = $600K stock + $100K relief of liabilities
©2008 Prentice Hall, Inc. 7-43
ExampleExample(3 of 4)(3 of 4)
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
©2008 Prentice Hall, Inc. 7-44
ExampleExample(4 of 4)(4 of 4)
What if Thomas’ basis had been $750K?Recognized loss: $ 0Basis (carryover): $750KDistribution gain or loss: $ 0
©2008 Prentice Hall, Inc. 7-45
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
©2008 Prentice Hall, Inc. 7-46
Financial Statement Financial Statement Implications Implications (2 of 2)(2 of 2)
Taxable asset acquisitionNontaxable asset acquisitionStock acquisitionPricing the acquisitionNet operating losses
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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
©2008 Prentice Hall, Inc. 7-48
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
©2008 Prentice Hall, Inc. 7-49
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.