1. Chapter 7: Corporate Acquisitions and Reorganizations

2. CORP ACQUISITIONS & REORGANIZATIONS (1 of 2)
Taxable acquisition transactions
Taxable vs. tax-free acquisitions
Tax consequences of reorganizations
Acquisitive reorganizations
Divisive reorganizations

3. CORP ACQUISITIONS & REORGANIZATIONS (2 of 2)
Other reorganization transactions
Judicial restrictions on reorganizations
Tax attributes
Limitation on use of tax attributes
Example

4. Taxable Acquisition Transactions
Asset acquisitions
Stock acquisitions w/ no liquidation
Stock acquisitions w/ liquidation
Stock acquisitions w/ deemed liquidation
See Table C7-1 for a summary

5. Asset Acquisitions Direct purchase of assets Target corporation
Gain or loss and depreciation recapture are computed by selling corporation on each asset
Acquiring corporation
Basis in assets is acquisition cost

6. Stock Acquisitions with No Liquidation (1 of 2)
How acquisition is accomplished
Shareholders of target corp sell their shares directly to purchaser corp
Target corp recognizes no gain/loss
Target corp s/hs recognize gain/loss
Payment to a s/h for a noncompete agreement is ordinary income to s/h

7. Stock Acquisitions with No Liquidation (2 of 2)
Purchaser corp consequences
Purchaser has a new subsidiary
Basis 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 assets
Tax attributes of target transfer to purchaser

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

9. Stock Acquisitions with Deemed Liquidation (1 of 3)
How acquisition is accomplished
Shareholders of target corp sell their shares directly to purchaser corp
Purchaser files §338 election pretending that target has been liquidated and a new subsidiary created in its place

10. Stock Acquisitions with Deemed Liquidation (2 of 3)
Target corp recognizes & losses on “pretend” sale of assets to itself
Subject to depreciation recapture
Target corp’s basis in its assets are stepped up (or down)
Sales price calculated on next slide
Target’s old tax attributes wiped out
New elections are made
See Topic Review C7-1 for summary

11. Stock Acquisitions with Deemed Liquidation (3 of 3)
ADSP = G + L - (TR x B)
(1 – TR)
ADSP: Adjusted deemed sale price
G: Acquiring’s grossed-up basis in the target corporation’s recently purchased stock
L: Target’s liabilities other tax liab for sale
TR: Applicable federal income tax rate
B: Adjusted basis of asset(s) deemed sold

12. Taxable vs. Tax-free Acquisitions (1 of 2)
Use of cash and debt for acquisition produce tax liability
Use of stock and limited cash or debt probably produce tax-free acquisition
Primary tax impact is on the seller
See Topic Reviews C7-2 & C7-3

13. Taxable vs. Tax-free Acquisitions (2 of 2)
FASB adopted SFAS No. 141
Pooling method no longer GAAP
Only purchase method allowed for GAAP for business combinations initiated after June 30, 2001.
FASB adopted SFAS No. 142
Goodwill no longer amortized for GAAP
Tested for impairment

14. Tax Consequences of Reorganizations
Target or transferor corporation
Acquiring or transferee corporation
Shareholders & security holders

15. Target or Transferor Corporation
No gain/loss on asset transfer
Assets retain depreciation recapture potential
Assumption of generally does not trigger gain recognition
No gain/loss on distribution of stock and securities as part of reorg plan

16. Acquiring or Transferee Corporation
No gain/loss recognized when it receives assets in tax-free reorg
Carryover basis of qualifying property
Gain recognized lesser of gain realized or FMV of nonqualified property received
Carryover holding period

17. 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 plan
Gain recognized lesser of gain realized or cash plus FMV of other property received

18. Shareholders & Security Holders (2 of 2)
Basis of stocks & securities received
Adjusted basis in stocks & securities
+ Gain recognized on the exchange
- Money & FMV of other property received
= Basis of nonrecognition property received

19. Acquisitive Reorganizations
Acquiring corp obtains part or all of assets or stock of a target corp
Tax consequences
Type A: Merger or consolidation
Type B: Stock for stock exchange
Type C: Assets for stock
Type D: Asset for stock
Type G: Bankruptcy

20. Tax Consequences Acquiring corporation Shareholders & security holders
Does not recognize gain/loss when it receives property as part of a tax-free exchange
Acquired property has a carryover basis
Shareholders & security holders
May have gain to extent “nonqualifying” property received as part of exchange

21. Type A: Merger or Consolidation
One company liquidates
Consolidation
Both companies liquidate and a new third company emerges
Triangle merger
Acquiring corp uses a controlled subsidiary to actually acquire target

22. 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 ownership
No other consideration can be used
Except for acquiring fractional shares and payment of certain expenses of target

23. 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 consideration
Substantially all means 70% of FMV of gross assets & 90% of FMV of net assets
Target liquidates itself

24. Type D: Asset for Stock Acquisitive D (1 of 2)
Acquiring corp obtains substantially all of target corp’s assets in exchange for acquiring corp’s voting stock & other consideration
Substantially all means 70% of FMV of gross assets & 90% of FMV of net assets

25. Type D: Asset for Stock Acquisitive D (2 of 2)
Target or target s/hs must control acquiring corp immediately after asset transfer
Control defined as either  50% of voting power of voting stock or  50% of total value of all stock
Target liquidates itself

26. 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

27. Divisive 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 reorganizations
Split-off
Spin-off
Split-up

28. 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

29. 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

30. 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

31. Other Reorganization Transactions (1 of 2)
Type E: Recapitalization
Reshuffling of corporate structure w/in framework of existing corp” (1942 S.C.)
Must have a bona fide business purpose for reorganization
Stock for stock, bonds for stock or bonds for bonds exchanged as part of a plan

32. Other Reorganization Transactions (2 of 2)
Type F: Administrative change
A mere change in identity, form or state of incorporation
Assets and liabilities of old corporation are transferred to new corporation
All old securities are exchanged for identical new securities

33. Judicial Restrictions on Reorganizations
Continuity of proprietary interest
Continuity of business enterprise
Business purpose
Step transaction doctrine
Substance over form

34. Tax Attributes Tax attributes follow assets
Acquiring 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

35. Limitation on Use of Tax Attributes (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

36. Limitation on Use of Tax Attributes (2 of 2)
§383 restricts tax credit and capital loss carryovers if §382 applies
Restrictions 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).

37. Example (1 of 4)
Thomas Corp transfers all assets and part of its liabilities to Andrews Corp. for $600K of Andrews ComStk. Following the merger, Thomas is liquidated
Thomas’ basis in assets $475K
Liabilities transferred $100K

38. Example (2 of 4) What is Thomas’ recognized gain or loss?
Gain realized: $700K - $475K = $225K
Boot received: $0
Recognized Gain: $0

39. Example (3 of 4) What is Andrews’ basis for the assets?
$475K (carryover)
How much gain/loss does Thomas recognize upon distribution of Andrews stock to Thomas’ shareholders?
No gain or loss

40. Example (4 of 4) What if Thomas’ basis had been $750K?
Recognized loss: $ 0
Basis (carryover): $750K
Distribution gain or loss: $ 0

41. End of Chapter 7
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