16-1 Types of Acquisitive Reorganizations  Type A reorganizations - statutory mergers and consolidations, forward and reverse triangular mergers  Type B reorganizations - stock for stock exchanges  Type C reorganizations - exchanges of stock for assets  Section 351 transactions

16-2 Type A Reorganizations  Must meet requirements of state law  Typically requires approval of shareholders of both target and acquirer  Merger: target is liquidated into the acquiring corporation; target shareholders receive acquiring corporation stock  Consolidation: target and acquirer combine to form new legal entity whose stock is issued to both shareholder groups

16-3 Type A Reorganizations continued  Forward triangular merger: Acquirer forms a new subsidiary into which target is merged, then sub may be liquidated into acquirer  Reverse triangular merger: Acquirer forms a new subsidiary which merges into target, with target as the surviving entity

16-4 Type C Reorganization  Asset acquisition based on contract  To qualify for nontaxable treatment, acquirer must obtain substantially all of target’s assets solely in exchange for voting stock of the acquiring corporation  Substantially all means 70% of FMV of gross assets and 90% of net assets  Solely for voting stock means at least 80% of value acquired using voting stock  Requirements are less flexible than an A reorganization, but nontax advantages may exist

16-5 Type B Reorganization  Requirements for nontaxability:  Exchange of target stock solely for voting stock of the acquiring corporation  Solely requirement is strict  Immediately after the exchange, the acquiring corporation must have at least 80% control of target  Control requires 80% of voting power and ownership of 80% of shares of each nonvoting class of stock  Control need not be acquired in the exchange, but must exist subsequent to the exchange

16-6 Section 351 Transactions  Newco formed  Acquirer and target shareholders exchange their stock for stock in Newco and other consideration  Exchanging shareholders receiving both stock and boot recognize gain (not loss) equal to the lesser of gain realized or FMV of boot received  Exchanging shareholders receiving only boot recognize gain or loss  Following exchange, Acquirer and Target are subsidiaries of Newco

16-7 Example: Nontaxable Acquisitions  Recall facts from Example on Taxable Acquisitions:  Acquiring corporation (A) is willing to purchase the stock of target corporation (T) for $364,000  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 carry forwards

16-8 Example continued  Determine the tax consequences of the following alternative nontaxable structures:  B reorg. with 100% stock consideration  A reorg. with 70% stock, 30% cash  C reorg. with 80% stock, 20% cash  Sec. 351 transaction with 45% stock, 55% cash  Assume that T’s shareholders will hold the A stock received for 3 years, during which time it appreciates at a before-tax rate of 12%. The after-tax discount rate is 8.5%.

16-9 Preservation of Target Corporation’s Tax Attributes  Accounting methods, earnings and profits, credit and net operating loss carryforwards  Stock acquisitions and nontaxable asset acquisitions (Type A and C reorganizations) generally preserve tax attributes, although use of loss carryforwards may be limited  Tax attributes are lost in taxable asset acquisitions

16-10 Limits on Use of Loss Carry- forwards after Ownership Change  Section Credit and loss carryforwards disallowed if principal purpose of acquisition was tax avoidance  Section Annual limit on amount of loss carryforward deductible following significant change in ownership of a loss corporation  Limit equals FMV of loss corporation’s stock on date of acquisition multiplied by long-term tax-exempt federal interest rate

16-11 Sec. 382 Limitation continued  Applies to any ownership change of more than 50% ownership of the loss corporation  Types of ownership changes  Owner shift - any change in ownership of a 5% or greater shareholder during the shorter of 1) the prior 3 years or 2) the time since the last ownership change  Equity structure shift - any nontaxable reorganization other than a divisive type D, type F, or type G

16-12 Nontax Issues  Nontaxable transactions require that a substantial portion of the consideration be acquirer stock  Dilutes existing acquirer shareholders’ holdings  Exposes target shareholders to undiversified risk of price fluctuations in acquirer stock  Ability to issue nonvoting stock (A reorg) can avoid diluting of existing shareholders’ control, but target shareholders may demand a premium