Exam 2 Review ch 7, 8 Flashcards
2 steps of type c reorganization
1 A voting stock exchanged (possibly other cornsideration)
Exchanged for substantially all T’s assets
2 T liquidates, voting stock distributed to shareholders for
T stock and securities
Why would an acquiring corporation want an acquisition to be tax free if it gets only substituted basis rather than step up basis for acquired assets?
2
1 target corp has tax attributes that provide economic benefit
To acquirer
2 acquirer may not have sufficient cash so it issues stock
Post reorganization structure of Type C reorganization
A’s and former T’s shareholders own A corp, which owns
Substantially all of T’s assets and liabilities
3 advantages of Type C reorganization
1 acquiring corp does not have to comply with merger laws
Of state and federal government (like in type A)
2 A corp. only assumes T’s assets and liabilities in acquisition
Agreement, unknown contingent liabilities not assumed (as in
Merger)
3 shareholder’s of A corp. need not approve transaction,
Reducing transaction cost
5 disadvantages of Type C reorganization
1 A corp must use voting stock as consideration
2 tighter boot restrictions under type C
3 T liabilities assumed by A corp. may be substantial
4 substantially all test
5 dissenting target corp. shareholders
Substantially all test
T corp. may want to sell, dispose or retain assets A corp. doesn’t
Want.
Can’t take actions shortly before asset for stock acquisition (type C)
Because may cause transaction to fail substantially all test
What kind of reorganization is a Type B reorganization?
Stock for stock reorganization
Single step in Type B reorganization
A corp exchanges voting stock for T stock from T corp
Giving A corp controlling interest in T corp
What is the post reorganization structure of a Type B reorganization?
A and former. T shareholders own A corp which controls the
T corp subsidiary
Minority T corp shareholders own 20% or less of T corp
Stock
5 advantages of Type B Reorganization 5
1 acquisition of. T stock accomplished in single transaction w/out
A’s shareholder approval or T’s management approval
2 target corp remains in existence, so its assets, liabilities and
Tax attributes don’t need to be transferred to A corp
3 corporate name, goodwill, licenses and rights of T corp
Preserved after acquisition
4 A corp doesn’t directly assume T corp’s liabilities
5 A and T corps can report post acquisition results on
consolidated basis
Disadvantages of Type B reorganization 5
1 A corp can only use voting stock as consideration
2 issuing additional stock dilutes voting power and control of
A corp shareholders
3 A corp must obtain 80% of T corp, when effective control
Can be less
4 may give rise to dissenting minority shareholders of T
Subsidiary stock
5 no step up basis for T corp stock or assets
What are the advantages of a taxable acquisition compared to a nontaxable reorganization? 4
1 step up basis
2 don’t need to give away voting stock
3 can recognize losses
4 acquire what you want
Disadvantages of taxable acquisition compared to nontaxable acquisition? 2
1 taxes paid
2 depreciation recaptured in transaction
Advantage of nontaxable reorganization compared to taxable acquisition?
Usually an advantage when tax attributes carry over to acquirer
Disadvantage of nontaxable reorganization compared to taxable acquisition?
Can dilute shares
A sole shareholder in a restaurant corporation, sells the business to a bartender in a taxable acquisition and liquidates the corporation: what are the tax consequences for the restaurant corporation? 3 things
1 Recognizes an ordinary gain/loss on sale of assets to acquirer
2 During liquidation, any property retained by restaurant corp is
Distributed to its sole shareholder
3 tax attributes remain with restaurant
A sole shareholder in a restaurant corporation, sells the business to a bartender in a taxable acquisition and liquidates the corporation: what are the tax consequences for the restaurant’s sole shareholder?
When shareholder receives liquidating distribution he recognizes
a capital gain or loss depending on his respective stock basis
A sole shareholder in a restaurant corporation, sells the business to a bartender in a taxable acquisition and liquidates the corporation: what are the tax consequences for the purchaser?
1 purchaser’s bases in acquired assets equals their acquisition
Cost
2 purchaser can eventually claim depreciation deductions based
On acquisition cost of Depreciable property
2 steps to type A reorganization (merger)
1 A corp exchanges stock (possibly other consideration) for
T’s assets and liabilities
2 T liquidates by giving stock of acquirer to shareholders in
Exchange for their T stock
Post reorganization structure of Type A merger
A’s and T’s former shareholders own A corp, which owns T’s
Assets and liabilities
2 steps of type A Reorganization: Consolidation
1 A corp distributes A stock to 2 different T corps for their
Assets and liabilities
2 both T corps liquidate: exchanging acquiring stock to
shareholders for their T stock
2 advantages of Type A reorganization
1 more flexible on consideration used in merger (can use up to
60% cash other property and debt instead of stock, don’t need
Voting stock)
2 substantially all assets need not be acquired
4 disadvantages of Type A reorganization
1 must comply with applicable corporate laws
2 dissenting shareholders in both A and T
3 all liabilities including contingent must be assumed
4 T might have nontransferable rights, licenses or privileges
That are lost
Type A triangular mergers
Same as type A merger except, subsidiary of parent acquires
target corp assets
3 advantages of Type A triangular merger
1 parent can’t be held directly responsible for contingent liabilities
of Target
2 shareholder approval is easy to obtain because parent is
Principal shareholder of subsidiary
3 target shareholders can recognize gain using installment method
Type A reverse triangular merger
Similar to triangular merger, except subsidiary merges into T corp
3 steps in Triangular Type A merger
1 A corp exchanges A stock with A subsidiary for subsidiary stock
2 A subsidiary exchanges A stock with T corp for T’s assets
And liabilities
3 T corp liquidates and distributes A stock to its shareholders
For their T stock
Post reorganization structure of Triangular Type A Reorganization
A’s and T’s former shareholders own A corp. which controls
A subsidiary that owns substantially all of T’s assets and lia.
2 steps Acquisitive type D reorganization
1 T corp transfers substantially all of T’s assets to A corp
In exchange for A stock
2 T corp liquidates giving A stock to its shareholders
In exchange for their T stock
Post reorganization structure for acquisitive type D reorganization
A’s shareholders own A corp
T’s former shareholders control A corp
Which 5 types of reorganizations does the acquiring corp obtain both the target corp’s tax attributes and assets?
1 Type A 2 Type C 3 Acquisitive Type D 4 Type F 5 Acquisitive Type G
What 2 reorganizations do the tax attributes not change hands?
Why?
Type B and Type E
Because assets not transferred from one corp to another
Under section 381, what 5 tax attributes are carried over?
1 NOL 2 Capital losses 3 E&P 4 General business credits 5 Inventory methods
NOLs from the period following the acquisition date cannot…
Be carried back by acquiring corp to offset target corp profits
Earned in tax years before the acquisition
When is the target corporation’s NOL carryover determined?
When can the Target’s NOL be used by the Acquiring corp?
Acquisition date
Can be used after the acquisition date
Section 382 and 269 are intended to discourage taxpayers from purchasing…
The assets or stock of corps having loss carryovers
When are section 382 NOL restrictions triggered?
When substantial change in stock ownership of loss corporation
Occurs in 3 year test period
Old loss corporation
Any target corp entitled to use NOL carryover or has NOL for tax year
Change in ownership occurs
And that undergoes the requisite stock ownership change
2 conditions, that must both occur for a substantial ownership change to trigger section 382 NOL restrictions?
1 stock ownership of any persons owning 5% or more of corp’s
Stock has changed or reorganization occurred
2 percentage of stock in new loss corp. owned by one or more
5% shareholders has increased by 50% over lowest percentage
Of stock owned in old loss corp
New loss corporation
Any acquiring corporation entitled to use NOL carryover after stock
Ownership change
In many acquisitive reorganizations, the sec. 382 stock ownership
Test is applied first with respect to the…
Old loss (target) corp
and
then to the new loss acquiring corp
NOL Loss limitation section 382 formula
Sec. 382 loss limitation =
value of old loss corporations stock) X (long term tax exempt fedl rate
What is the carry forward for NOL deferred by sec. 382 loss limitation?
20 years, can’t deduct more than the NOL loss limitation over
Those years
What disallows the use of NOL carryovers?
New loss corp (acquirer) discontinues business of old loss corp
(Target), within 2 years after acquisition date
What does section 383 restrict? How are the restrictions applied?
Use of tax credits and capital loss carryovers when stock
Ownership change occurs
Restrictions are applied the same way as section 382
Inter company transaction
Transaction between 2 corporations that are in same
consolidated group immediately after transaction
3 concepts of reporting inter company transactions
1 inter company item
2 corresponding item
3 recomputed corresponding item
Inter company item
Selling corp’s income, gain, deduction and loss from inter company
Transaction
Corresponding item
Buying corps income, gain, deduction and loss from
inter company transaction
Or from property acquired in inter company transaction
Recomputed corresponding item
Corresponding item the buyer corp would have if it and selling
Corp were 2 divisions of single corp
And transaction occurred between those divisions
Inter company transactions: Separate entity concept
Selling and buying corps involved in inter company transaction
Generally treated as separate entities
in determining amount of income, gain, deduction and loss
That each incurs
4 common events that trigger recognition of inter company item
1 buying corp sells to 3rd party property from inter company
Transaction
2 buying corp claims depreciation deductions
3 buying or selling corp leaves consolidated group
4 corps in affiliated group discontinue filing consolidated returns
And file individual returns
