Ch 3 Deck 2 Flashcards
Do S-Corps prefer the sale of their corporation to be made through a stock sale or a sale of assets?
may not care because of pass-through taxation
Section 338(h)(10) election allows
a stock acquisition to be treated like an asset purchase
Section 338(h)(10) is only available to buyers of
S-corps or subsidiaries of a consolidated group
In a Section 338(h)(10) election, the buyer will be able to
take advantage of a stepped-up cost basis
In a Section 338(h)(10) election the target will have to
pay tax on a gain from the asset sale
a company restructures its capital set-up
recapitalization
altering the proportion of capital from equity to capital from debt is an example of
recapitalization
The Internal Revenue Code allows a corporation to make a tax-free acquisition of another corporation if the transaction
follows a technique described in the code
IRC technique for tax free acquisition involves transferring buyer’s stock to target shareholders in exchange for
stock or assets of target
the target merges into the buyer corporation
Type A reorganization
in a type A reorganization, target merges into buyer corporation usually in exchange for
buyer stock or some other form of consideration
In a Type A reorganization the target can also merge into
an LLC that is wholly owned by the buyer
In a Type A reorganization one benefit of the target merging into an LLC is avoiding
a premerger vote by buyer shareholders
In a Type A reorganization one benefit of the target merging into an LLC is avoiding
it can separate out the target liabilities into limited liability entity with no tax impact
In Type A reorganizations, the target shareholders receive
the buyer stock
In Type A reorganizations, the target shareholders may also receive
cash or other consideration
In Type A reorganizations, any cash or other consideration received by target shareholders is
taxable under the boot rules
A type B reorganization under IRC Section 368(a)(1)(B) involves the buyer’s acquisition of control of the target solely in exchange for
voting stock of the buyer or its parent corporation
In a type B reorganization under IRC Section 368(a)(1)(B) Control means
80% of total combined voting power
In a type B reorganization under IRC Section 368(a)(1)(B) the ONLY acceptable form of consideration is
voting stock of the buyer or its parent
An Internal Revenue Code 338(h)(10) election is set up for purchasers of
S corporations or subsidiaries who make a qualified stock purchase
An Internal Revenue Code 338(h)(10) election allows the purchaser and seller to
treat a stock sale like an asset sale for tax purposes
In an Internal Revenue Code 338(h)(10) election severance payments to terminated employees are generally
tax deductible if covered under the acquisition
In an Internal Revenue Code 338(h)(10) election severance payments to terminated employees are generally not tax deductible if
the payments are made after the purchase
Under IRS Rule 338(h)(10), both acquisition costs and liabilities transferred to the buyer are added to
the basis of assets acquired in the merger
Under IRS Rule 338(h)(10), The elections are filed on
IRS form 8023
Under the IRC, corporations merging are allowed a
qualified stock purchase
Under the IRC, when a buyer purchases at least 80% of the total voting power and value of the stock of the seller it is a
qualified stock purchase
A qualified stock purchase must take place during
a 12-month period
In a qualified stock purchase what cannot be used to compute voting power?
preferred stock
IRS Rule 280G covers
Golden Parachute Payments.
an agreement between a corporation and an employee (usually an executive) that the employee will receive certain benefits if he is terminated.
golden parachute
typically severance packages paid to a company’s top executives in the event of a merger or acquisition of that company.
golden parachute
Under Rule 280G the corporation may not deduct the excess if a payment is
more than three times the base pay of a highly compensated employee
Under Rule 280G if a payment is more than three times the base pay of a highly compensated employee the employee must
pay a 20% excise tax on the excess payment
Under Rule 280G when calculating the excess payment, these things must be added to the payout:
any life, health and disability insurance premiums paid by the corporation for the employee
Sell side steps of setting up the process:
- Prepare and finalize the engagement letter
- Meet with seller to determine the goals and structure of sale
- Due diligence on target
- Preliminary valuation analysis
- Choose type of sale process
- Identify and analyze buyers
states the legal relationship between an investment bank and its client
engagement letter
An engagement letter should be as
specific as possible
An engagement letter should list, in great detail, the
services which are to be provided
Sale structuring options include
stock vs. asset sale
merger vs. tender offer
Sale side due diligence includes
meeting with management
research into business
research into financial model
Preliminary valuation analysis may include
DCF analysis LBO analysis precedent transaction analysis comparable companies analysis SOTP analysis
