Class 5-9 Notes Flashcards
Asset acquisition
Company buys certain agreed upon assets
Direct purchase of assets
Reorganization
Entity trying to emerge as future taxable entity
Stock acquisition
1 company acquires the stock of another company
Buying out ownership interest
3 types of stock acquisitions
1 stock acquisition with no liquidation
2 stock acquisition with liquidation
3 sec. 338 deemed sale election
Stock acquisition with liquidation: when is it tax free?
Parent must own 80% of subsidiary for the liquidation
To be tax free
Sec. 338 deemed sale election
Combination of stock acquisition and asset acquisition
In a stock acquisition, what is the acquirers basis in the target stock
Basis in target stock = acquisition cost
When are target corporations ripe for acquisitions?
When they are struggling financially
When is the premium paid for a target corporation lost
When the acquirer owns less than 100% of the target corporation
Section 338: exchanging stock for stock and partial liquidation, when is it advantageous?
Advantageous when NOL, because it offsets gain coming in
In the year of acquisition, what is the goal of section 338?
Create tax favorable environment to save employees jobs,
So they can keep paying taxes
In section 338 what happens to a target company’s tax elections?
They go away
If the majority of an acquisition uses cash and debt…
It is usually taxable for the target corporation
Stock for stock transactions, how are they treated tax wise?
Qualify as non taxable event at shareholder level until stock is sold
What does goodwill get tested for?
Impairment
Transferor
Transferee
Transferor = target corporation
Transferee = acquiring corporation
Which bankruptcy proceeding involves a surviving entity?
Ch. 11 bankruptcy
Merger vs. consolidation
In a merger 1 company liquidates
In a consolidation both companies liquidate and a 3rd company emerges
What is important to track in mergers and acquisitions? 3 things
1 adjusted basis in assets
2 debt forgiven
3 impact on shareholders equity
Consideration
Anything of value
Ex. Cash, property, future promise, foregoing a right of privilege
What is a stock for stock acquisition like compared to individual taxation?
Like a like-kind exchange but at the corporate level
In a stock for stock acquisition a company can…
Continue and not be liquidated
Bankruptcy
Court approved plan
3 types of court approved reorganizations
1 split off
2 spin off
3 split up
Split off
Parent transfers assets to controlled subsidiary in exchange
For subsidiary’s stock
The parent converts the subsidiary’s stock to parent stock
And distributes it to shareholders
Spin off
After transfer of asset, give subsidiary’s stock to shareholders
Split up
After transfer of asset, give 2 or more subsidiary stocks to
shareholders
Divisive G Reorganization
Transferor corporation may continue in business or be liquidated
Based on what court decides
IRC and bankruptcy court have requirements to…
Avoid taxation
In chapter 7 the government is trying to create an environment for business where…
They don’t have to fear tax transactions during mergers and
Acquisitions
Attribution, example
Carries over
Ex. Wife participates in what husband does
When is there no change in basis
No change in basis when there is nontaxable transfer of assets
Taxable business combination
Acquirer spends less cash by using debt
What is the point of reorganization under bankruptcy?
Give a troubled business a chance to be viable
When can bankruptcy be declared?
When insolvent
Insolvent
Debt exceeds assets and cashflow
How often is basis in partnership and S-corporation adjusted?
Adjusted on annual basis
Liquidating
Corporation is distributing assets other than retained earnings
Consolidated
Multiple corporations filing 1 return
Capital ex.
Land and building
Selling inventory to a 3rd party
Completes transaction
Inventory sale is deferred when…
Sold to subsidiary in affiliated group
Tax advantages from 80% ownership interest
100% tax advantages
Company that acts like apparent provides what to a subsidiary?
Management services
When subsidiary depreciates inventory…
It triggers recognizing gain or loss
What percentage of government revenue comes from corporate income tax?
10% government revenue
What is the underlying concept in the tax code and the key to everything?
Basis
What is the basis for salary and wages and dividends?
$0
In an individuals life, what basis is disallowed?
training or college degree to get a job
What is the basis of operational income?
$0
Company assets that produce operation income have…
Basis
What is essential for an acquisition plan to be executed?
Must be in writing and all parties must agree
NOL comes into existence when…
Deductions exceed gross income
When is NOL most advantageous?
In onetime non recurring loss
Tax deferral gives the tax payer what?
Time to plan taxes well
What makes an acquisition make sense? 2 things
1 courts look for acquisition that allows target corp to continue to
Operate
2 licenses and contracts that continue because corp continues
To operate
