Ch13: TaBS, Mergers, Acquisitions, Divestitures Flashcards
Acquisition Methods for Freestanding C Corporations
- Taxable purchase of T’s assets
- Nontaxable purchase of T’s assets
- Taxable purchase of T’s stock with a Sec. 338 election
- Taxable purchase of T’s stock without a Sec. 338 election
- Nontaxable purchase of T’s stock
Taxable Stock Acquisition: Section 338 Election
338 applies to taxable stock acquisitions. Under 338, the buyer can elect to treat the purchase of the seller’s stock as an asset purchase.
Purchase the stock of the target; equal to the stock purchase price.
cash consideration (from buyer) taxable to target shareholders target corporation-level taxable gain step-up in the tax-basis of T assets target's tax attributes DON'T survive
*T’s NOL.c/f can be used to reduce T’s recapture and capital gains taxes on the asset sale
Taxable Stock Acquisition: NO Section 338 Election
cash consideration taxable to T's shareholders NO target corporation-level taxable gain NO step-up in the tax basis of T's assets target's tax attributes SURVIVE
Divestiture Methods
- subsidiary stock sale
- subsidiary asset sale
- spin-off
- equity carve-out
Section 338(h)(10)
In a stock sale of a subsidiary of a C Corp or S Corp, the buyer and seller must agree to elect to treat the stock as an asset sale.
With the election, the buyer takes a stepped-up basis in the subsidiary’s assets; without an election, the buyer takes a carryover basis.
Spin-off
Spin-offs are almost always nontaxable.
The parent that is divesting the subsidiary distributes the stock of the sub to the parent shareholders pro-rata.
Cash is not received by the divesting parent.
No taxable gain to the divesting parent.
Usually, no taxable gain to the divesting parent’s shareholders.
No step-up; the tax basis of the sub that is spun-off is a carryover basis.
Equity Carve-out
The parent sells the stock of its subsidiary to the public for cash.
Cash is received by the parent.
Usually, no taxable gain to the divesting parent.
Usually, no taxable gain to the divesting parent’s shareholders.
No step-up in the tax basis of the subsidiary’s assets.
Section 197
Since 1997, goodwill and most purchased intangible assets can be amortized over a 15-year period.
Tax-deductible goodwill arises only from an acquisition in which the target’s tax basis is stepped-up; step-ups usually occur almost exclusively in divestitures and acquisitions of pass-through entities; tax-deductible goodwill is rare when the target is a freestanding C corporation.
Under GAAP, goodwill is not tax deductible; it doesn’t appear on the tax-basis balance sheets.
Transactional Substitutes
Transactions besides acquisitions are transactional substitutes.
If a firm (T) cannot use its NOL.c/f, it may be able to exploit its tax benefits by transferring its tax attributes to another firm (A).
The target could purchase high explicit tax assets to generate EBT that would offset the NOL.c/f.
The target corporation could buy a profitable company so it could use its NOL.
Section 368
Nontaxable Stock Sale: the target’s shareholders will not generally recognize gains from the exchange of their T stock for A stock.
No step-up in the tax-basis of T assets
A generally retains T’s tax attributes
Taxable Asset Acquisition
cash consideration (from buyer) taxable to target shareholders target corporation-level taxable gain step-up in the tax-basis of T assets target's tax attributes DON'T survive
Nontaxable Asset Acquisition
stock consideration (from buyer) nontaxable to target shareholders NO target corporation-level taxable gain NO step-up in the tax-basis of T assets target's tax attributes SURVIVE
Nontaxable Stock Acquisition
stock consideration (from buyer) nontaxable to target shareholders NO target corporation-level taxable gain NO step-up in the tax-basis of T assets target's tax attributes SURVIVE
