Ch 7 part 1 Flashcards
Section 338 election
Adjusts the aggregate basis of subsidiary assets to price
Acquiring corp. paid for subsidiary
+ amount of subsidiary laibilities
3 options exist once the acquiring corporation has purchased the target stock
1 acquiring corp. and new subsidiary can exist as separate entities
2 acquiring corporation can liquidate new subsidiary in
Non taxable transaction and retain direct interest in target corp.
Assets
3 acquiring corp can make section 338 election
Purchaser’s basis in acquired assets
Purchaser’s basis in acquired assets = acquisition cost
2 advantages taxable asset acquisition provides to the purchaser
1 significant portion of acquisition cost can be debt financed
And interest on debt is deductible for tax purposes
2 only assets and liabilities specified in purchase sale agreement
Are acquired, contingent or unknown liabilities remain responsibilty
Of seller
Use of debt in a non taxable acquisition
Use of debt is prohibited or restricted
If a target corporation liquidates, what happens to property retained by the target corporation?
The property gets distributed to shareholders, shareholders
Recognize a capital gain or loss on the transaction
The liquidating corporation recognizes a gain or loss on the
distribution
Stock acquisition: purchaser’s basis in stock?
Target corporation’s basis ?
Purchaser’s basis = acquisition cost
Target corporation’s basis = does not change as result of stock sale
Stock acquisition: any recapture that exists on transaction date
Remains with the target corporation’s assets assumed by the
Purchaser
Why are stock sales popular with sellers
Often less costly than asset sales due to single level of taxation
Tax advantage of purchasing target corporation assets
When is it available?
Higher asset basis
Not available in stock purchase unless purchasing corp makes
A sec. 338 deemed sale election
Stock acquisition followed by liquidation, when is liquidation non taxable?
Liquidation is non taxable when parent owns 80% of subsidiary
Stock acquisition followed by liquidation, what happens to basis of subsidiary’s assets?
Basis of subsidiary’s assets carry over to parent
Stock acquisition followed by liquidation: If a parent paid a premium for the assets, upon liquidation…
The premium is lost, because the parent’s basis in the stock
Disappears
Stock acquisition followed by liquidation: if the parent paid less than the aggregate asset adjusted basis, the excess asset basis…
Is included in the asset carryover basis
Which can provide additional tax benefits
ADSP
Aggregate deemed sale price
Section 338 deemed sale election: tax consequences
When is the election beneficial?
Requires seller to recognize gains and losses on final tax return
Beneficial when target corporation has stream of NOLs
Section 338 eligibility
Occurs when parent corp. acquires at least 80% voting and value
Of target corporation stock in period less than 12 months
80% requirement: 4 stock acquisitions not treated as purchases that count toward 80% minimum threshold
1 stock acquired as capital contribution
2 stock whose basis is determined by FMV on date of
descendant’s death
3 stock acquired in non taxable transaction under corporate
Formations, divisions or reorganizations
4 stock acquired from related party
When must a section 338 election be made
No later than the 15th day of nine months after 80% shares
Have been acquired
Aggregate deemed sale price
Taxable transaction, under section 338
Target corporation is treated as having sold all its assets at
Their aggregate deemed sale price at close of acquisition date
Aggregate Deemed Sale Price (ADSP) equation
ADSP = [G + L - (Tr x B)]/(1 - Tr)
G = acquiring corp.'s grossed up basis in target corp. stock L = target corp.'s liabilities other than tax liability for deemed sale gain Tr = federal income tax rate B = adjusted basis Of assets deemed sold
Adjusted grossed up basis
Tax basis in the assets of the new target corporation
Based on amount paid by acquiring corporation for target stock
Target corporations stock owned by acquiring corporation falls into what 2 categories?
1 recently purchased stock
2 unrecently purchased stock
Only recently purchased stock is treated as…
Consideration used in deemed purchase of target corporation
Assets
Recently purchased stock
Includes all stock held on acquisition date that the acquirer
Purchased within the last 12 months
Basis of purchasing corporations ownership interest
Basis of purchasing corporation’s ownership interest =
(Grossed up basis of recently purchased stock)
+ (basis of non recently purchased stock)
When acquiring corporation does not own all of target corporation’s outstanding stock, the basis of the acquiring corporation’s recently purchased stock…
Must be increased or grossed up to hypothetical value that
Reflects ownership of all the stock
On day following the acquisition date, the Basis of recently purchased stock must be…
Increased by the face amount of target liabilities outstanding + tax liability incurred on any gain realized in deemed sale
Tax accounting elections for new target corporation: tax return filed?
Holding period
Files tax return separate from acquiring corporation
It’s holding period begins day after acquisition
Tax attributes in sec. 338 deemed sale election for new corporation
Tax attributes that exist on acquisition date are lost
In sec. 338 deemed sale election for new corporation
Tax consequences of section 338 election: old target corporation
Old target corporation is treated as having sold all its assets to
New target corporation at aggregated deemed sales price in
Single transaction at close of acquisition date
Old target corp. recognizes gain or loss on deemed sale
Sec. 338 election, the new target corporation takes an aggregate asset basis equal to…
Acquiring corporation’s adjusted grossed up basis in target stock
Adjusted grossed up basis equation
Adjusted grossed up basis =
Corp.’s basis in target stock day following acquisition
+ target corp’s liabilities day after acquisition + relevant items
Total adjusted gross basis is allocated to individual assets under…
The residual method
Residual method
Requires allocation of basis first to cash and cash equivalents,
Then to tangible assets and intangible assets
Finally allocates basis to goodwill and going concern
In a section 338 election the new target corporation makes…
New tax year and accounting method elections
Assume acquiring corporation acquires target corporation’s assets and liabilities and target corporation liquidates immediately after acquisition.
If the acquiring corporation uses cash and other property to purchase assets, how is the target corporation taxed? How are its shareholder’s taxed?
Target corporation taxed on sale
Shareholder’s taxed on liquidation
If the acquiring corporation uses its own stock, what may the acquisition qualify as?, tax implications.
Acquisition may qualify as reorganization
Non taxable to target corporation and its shareholders
Tax consequences to target corporations under section 1001 c
Requires entire gain or loss realized on sale or exchange of
Property be recognized by target corporations
(To target corporation) Exception to section 1001, 3 things
Reorganization is exception to general rule
Target corporations recognize no gain or loss when it exchanges
Assets for acquiring corporation stock
Also recognizes no gain or loss when it distributes acquiring corp.’s
Stock to shareholders
When could a target organization recognize a gain during a reorganization?
If target corp. receives boot and doesn’t distribute boot to
Shareholders
Or if distributes boot or retained property whose FMV exceeds
Adjusted basis
Retained property
Property not transferred to acquiring corporation as part of
Acquisition
Tax consequences to acquiring corporation: issuing stock in exchange for property
Recognizes no gain/loss when it issues it’s stock in exchange
For property in either taxable or non taxable acquisition
In a taxable acquisition, what is the basis and holding period for the acquiring corporation?
Cost FMV basis in assets received
Holding period begins day after acquisition
In reorganization what is the basis for an
Acquiring corporation? What happens to basis if target corp. recognizes gain on boot it doesn’t distribute to shareholders?
Carryover basis equal to target’s basis
If target corp. recognizes gain because it doesn’t distribute boot
To shareholder’s, carryover basis is adjusted upwards?
In a taxable acquisition all the target corporation’s tax attributes…
Non taxable acquisition?
Disappear when it liquidates
In non taxable acquisition acquiring corp. inherits target corp.’s
Tax attributes
If target corp. liquidates as part of taxable acquisition, what are the tax consequences to its shareholders? Basis of target corporation assets received?
Shareholders recognize a gain or loss on the surrender of their
Stock
Basis of target corp. assets received = their FMV
Reorganization requires shareholders to recognize gain…
What is character of the gain?
Only to extent they receive boot
Gain generally capital in character, sometimes dividend
For financial reporting purposes, what is the only available method to account for acquisitions? What does this mean?
Purchase method
Means acquired assets must be recorded at FMV and
Goodwill can’t be amortized but must be periodically tested
For impairment
If acquiring corporation is member of affiliated group that files consolidated return, the target corporation must…
What happens otherwise?
Join in the consolidated return election if acquiring corp. owns
80%
Otherwise the acquiring corporation and target corp. can make
Initial consolidated tax return election
Depreciation recapture: taxable acquisition vs. nontaxable reorganization
Taxable acquisition: depreciation recaptured
Nontaxable reorganization: depreciation not recapture unless
Boot triggers recognition of gain
Basis of stock and securities in taxable acquisition
Cost, generally FMV of stock securities or other property
Received
Basis of stock and securities received in non taxable reorganization
Substituted basis referenced to stock and securities surrendered,
FMV of boot property
Consideration used in taxable acquisition? Nontaxable reorganization?
Taxable acquisition: primarily cash and debt
Nontaxable reorganization: solely voting stock of acquiring parent
Corp.
