Ch 7 part 1

Question 0

Section 338 election

Answer 0

Adjusts the aggregate basis of subsidiary assets to price
Acquiring corp. paid for subsidiary

+ amount of subsidiary laibilities

Question 1

3 options exist once the acquiring corporation has purchased the target stock

Answer 1

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

Question 2

Purchaser’s basis in acquired assets

Answer 2

Purchaser’s basis in acquired assets = acquisition cost

Question 3

2 advantages taxable asset acquisition provides to the purchaser

Answer 3

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

Question 4

Use of debt in a non taxable acquisition

Answer 4

Use of debt is prohibited or restricted

Question 5

If a target corporation liquidates, what happens to property retained by the target corporation?

Answer 5

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

Question 6

Stock acquisition: purchaser’s basis in stock?

Target corporation’s basis ?

Answer 6

Purchaser’s basis = acquisition cost

Target corporation’s basis = does not change as result of stock sale

Question 7

Stock acquisition: any recapture that exists on transaction date

Answer 7

Remains with the target corporation’s assets assumed by the

Purchaser

Question 8

Why are stock sales popular with sellers

Answer 8

Often less costly than asset sales due to single level of taxation

Question 9

Tax advantage of purchasing target corporation assets

When is it available?

Answer 9

Higher asset basis

Not available in stock purchase unless purchasing corp makes
A sec. 338 deemed sale election

Question 10

Stock acquisition followed by liquidation, when is liquidation non taxable?

Answer 10

Liquidation is non taxable when parent owns 80% of subsidiary

Question 11

Stock acquisition followed by liquidation, what happens to basis of subsidiary’s assets?

Answer 11

Basis of subsidiary’s assets carry over to parent

Question 12

Stock acquisition followed by liquidation: If a parent paid a premium for the assets, upon liquidation…

Answer 12

The premium is lost, because the parent’s basis in the stock

Disappears

Question 13

Stock acquisition followed by liquidation: if the parent paid less than the aggregate asset adjusted basis, the excess asset basis…

Answer 13

Is included in the asset carryover basis

Which can provide additional tax benefits

Question 14

ADSP

Answer 14

Aggregate deemed sale price

Question 15

Section 338 deemed sale election: tax consequences

When is the election beneficial?

Answer 15

Requires seller to recognize gains and losses on final tax return

Beneficial when target corporation has stream of NOLs

Question 16

Section 338 eligibility

Answer 16

Occurs when parent corp. acquires at least 80% voting and value
Of target corporation stock in period less than 12 months

Question 17

80% requirement: 4 stock acquisitions not treated as purchases that count toward 80% minimum threshold

Answer 17

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

Question 18

When must a section 338 election be made

Answer 18

No later than the 15th day of nine months after 80% shares

Have been acquired

Question 19

Aggregate deemed sale price

Answer 19

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

Question 20

Aggregate Deemed Sale Price (ADSP) equation

Answer 20

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

Question 21

Adjusted grossed up basis

Answer 21

Tax basis in the assets of the new target corporation

Based on amount paid by acquiring corporation for target stock

Question 22

Target corporations stock owned by acquiring corporation falls into what 2 categories?

Answer 22

1 recently purchased stock

2 unrecently purchased stock

Question 23

Only recently purchased stock is treated as…

Answer 23

Consideration used in deemed purchase of target corporation

Assets

Question 24

Recently purchased stock

Answer 24

Includes all stock held on acquisition date that the acquirer
Purchased within the last 12 months

Question 25

Basis of purchasing corporations ownership interest

Answer 25

Basis of purchasing corporation’s ownership interest =
(Grossed up basis of recently purchased stock)
+ (basis of non recently purchased stock)

Question 26

When acquiring corporation does not own all of target corporation’s outstanding stock, the basis of the acquiring corporation’s recently purchased stock…

Answer 26

Must be increased or grossed up to hypothetical value that

Reflects ownership of all the stock

Question 27

On day following the acquisition date, the Basis of recently purchased stock must be…

Answer 27

Increased by the face amount of target liabilities outstanding + tax liability incurred on any gain realized in deemed sale

Question 28

Tax accounting elections for new target corporation: tax return filed?

Holding period

Answer 28

Files tax return separate from acquiring corporation

It’s holding period begins day after acquisition

Question 29

Tax attributes in sec. 338 deemed sale election for new corporation

Answer 29

Tax attributes that exist on acquisition date are lost

In sec. 338 deemed sale election for new corporation

Question 30

Tax consequences of section 338 election: old target corporation

Answer 30

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

Question 31

Sec. 338 election, the new target corporation takes an aggregate asset basis equal to…

Answer 31

Acquiring corporation’s adjusted grossed up basis in target stock

Question 32

Adjusted grossed up basis equation

Answer 32

Adjusted grossed up basis =
Corp.’s basis in target stock day following acquisition
+ target corp’s liabilities day after acquisition + relevant items

Question 33

Total adjusted gross basis is allocated to individual assets under…

Answer 33

The residual method

Question 34

Residual method

Answer 34

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

Question 35

In a section 338 election the new target corporation makes…

Answer 35

New tax year and accounting method elections

Question 36

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?

Answer 36

Target corporation taxed on sale

Shareholder’s taxed on liquidation

Question 37

If the acquiring corporation uses its own stock, what may the acquisition qualify as?, tax implications.

Answer 37

Acquisition may qualify as reorganization

Non taxable to target corporation and its shareholders

Question 38

Tax consequences to target corporations under section 1001 c

Answer 38

Requires entire gain or loss realized on sale or exchange of
Property be recognized by target corporations

Question 39

(To target corporation) Exception to section 1001, 3 things

Answer 39

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

Question 40

When could a target organization recognize a gain during a reorganization?

Answer 40

If target corp. receives boot and doesn’t distribute boot to
Shareholders

Or if distributes boot or retained property whose FMV exceeds
Adjusted basis

Question 41

Retained property

Answer 41

Property not transferred to acquiring corporation as part of
Acquisition

Question 42

Tax consequences to acquiring corporation: issuing stock in exchange for property

Answer 42

Recognizes no gain/loss when it issues it’s stock in exchange
For property in either taxable or non taxable acquisition

Question 43

In a taxable acquisition, what is the basis and holding period for the acquiring corporation?

Answer 43

Cost FMV basis in assets received

Holding period begins day after acquisition

Question 44

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?

Answer 44

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?

Question 45

In a taxable acquisition all the target corporation’s tax attributes…
Non taxable acquisition?

Answer 45

Disappear when it liquidates

In non taxable acquisition acquiring corp. inherits target corp.’s
Tax attributes

Question 46

If target corp. liquidates as part of taxable acquisition, what are the tax consequences to its shareholders? Basis of target corporation assets received?

Answer 46

Shareholders recognize a gain or loss on the surrender of their
Stock

Basis of target corp. assets received = their FMV

Question 47

Reorganization requires shareholders to recognize gain…

What is character of the gain?

Answer 47

Only to extent they receive boot

Gain generally capital in character, sometimes dividend

Question 48

For financial reporting purposes, what is the only available method to account for acquisitions? What does this mean?

Answer 48

Purchase method

Means acquired assets must be recorded at FMV and
Goodwill can’t be amortized but must be periodically tested
For impairment

Question 49

If acquiring corporation is member of affiliated group that files consolidated return, the target corporation must…

What happens otherwise?

Answer 49

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

Question 50

Depreciation recapture: taxable acquisition vs. nontaxable reorganization

Answer 50

Taxable acquisition: depreciation recaptured

Nontaxable reorganization: depreciation not recapture unless
Boot triggers recognition of gain

Question 51

Basis of stock and securities in taxable acquisition

Answer 51

Cost, generally FMV of stock securities or other property

Received

Question 52

Basis of stock and securities received in non taxable reorganization

Answer 52

Substituted basis referenced to stock and securities surrendered,
FMV of boot property

Question 53

Consideration used in taxable acquisition? Nontaxable reorganization?

Answer 53

Taxable acquisition: primarily cash and debt

Nontaxable reorganization: solely voting stock of acquiring parent
Corp.