Ch16: TaBS, Nontaxable Acquisitions

Question 1

Section 382

Answer 1

annual limitation on NOL following a change of ownership; at least a 50% change in ownership over 3 years will trigger 382

annual limitation = FmV.asset x Fed. Lt Tax-Exempt Rate
FmV.asset = PRICE.asset

382 limits the NOLs that survive in a nontaxable acquisition.

Question 2

Section 368

Answer 2

The section that defines three of the four nontaxable acquisition methods for a freestanding corporation.

Judicial requirements for a tax-free reorganization:

1. continuity of proprietary interest
2. continuity of business enterprise
3. valid business purpose

Question 3

Section 368 A

Answer 3

1. consideration: at least 40% of acquiring firm’s stock; voting, non-voting, preferred or common stock
2. assets are acquired
3. benefits: flexibility of consideration, can use up to 50% cash; nontaxable treatment for some T shareholders while providing cash to the extent of 60% shareholders.
4. costs: statutory merger; assumption of T liabilities; some assets don’t transfer

Question 4

Section 368 A, triangular

Answer 4

1. consideration: at least 40% of acquiring firm’s stock
2. assets are acquired
3. benefits: some protection against liability via subsidiary; avoids A shareholder vote; assets of the target that can’t transfer can be acquired via a reverse triangular merger
4. costs: restrictions on the type and quantity of stock consideration; must qualify as a merger under state law

Question 5

Section 368 B

Answer 5

1. consideration: stock for stock merger; 100% of acquiring firm’s voting stock; preferred or common
2. stock is acquired
3. benefits: simple, low transaction costs; all of the assets of T are acquired; target becomes subsidiary of A and provides some liability protection;
4. costs: must use stock; ALL of T liabilities survive; dilution of the acquiring firm’s shareholder control

Question 6

Section 368 C

Answer 6

1. consideration: stock for asset merger; at least 80% of A voting stock
2. assets are acquired
3. benefits: can combine cash and stock consideration; not a statutory merger
4. costs: strict requirements; some assets may not transfer; if boot is used, all of the target’s liabilities count towards the 20% nonstock limit

Question 7

Section 351

Answer 7

1. consideration: stock, debt or cash; investors must receive stock compensation of new company and control the new company
2. stock or assets are acquired
3. benefits: flexible with consideration
4. costs: a complex structure; issues with asset transfer