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Final Exam Flashcards

0
Q

I.R.C. 162(m)

A

Limits tax deductibility of executive compensation to $1MM

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1
Q

I.R.C. 197

A

Provides that amortization on goodwill and other intangibles is tax deductible

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2
Q

I.R.C. 1259

A

Makes constructive sales of appreciated property taxable at the time of constructive sale

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3
Q

I.R.C. 355

A

Specifies various requirements in order for a spin-off to be tax-free

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4
Q

I.R.C. 302 (b) (2)

A

Relates to the tax treatment of stock redemptions. Stock redemptions are taxed as sales if they are substantially disproportionate

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5
Q

What strategies have companies doing business in India used to reduce their tax burden?

A

Shift income to Mauritius

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6
Q

How did UPS reduce income taxes on its package insurance business?

A

Spun off the package insurance business to Bermuda, then shifted income to Bermuda

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7
Q

What led Usain Bolt to avoid track meets in the U.K.?

A

U.K. taxes on his worldwide income based on his participating in track meets in the U.K.

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8
Q

I.R.C. 338

A

Taxable stock of a freestanding company that is taxed like an asset sale. A rarely used structure since the Tax Reform Act of 1986

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9
Q

What strategy did Chinese couples use to reduce taxes due upon sale of their homes?

A

Got divorced

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10
Q

What simple strategy could the owners of Tumblr have used to save significant income taxes on the sale of Tumblr to Yahoo?

A

Accelerated closing of the sale into 2012

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11
Q

What created tax benefits for Proctor & Gamble in its acquisition of Clairol from Bristol Myers?

A

338(h)(10) election and resulting step up in basis of clairol’s assets

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12
Q

How much, in present value dollars at the time of the deal, were the tax benefits for Proctor & Gamble in the Clairol transaction?

A

About $1bn

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13
Q

How much, as a percentage of deal value, were the tax benefits for Proctor and Gamble in the Clairol transaction?

A

About 20% of the deal’s value

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14
Q

I.R.C. 382

A

Limits the use of a target’s tax attributes (eg NOLs) post-acquisition

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15
Q

What was an asserted unintended consequence of the 1993 tax deductible limit on executive compensation of $1MM?

A

Excess use of employee stock options and a resulting incentive for executives to inflate accounting earnings and ultimately commit accounting fraud

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16
Q

I.R.C. 386 (a) (1) (B)

A

Tax free stock for stock merger

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17
Q

What event allowed KB Home to recognize $100MM+ in tax benefits in 2010?

A

Extension of NOL carryback period from 2 to 5 years allowed for refund of previously paid taxes

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18
Q

President George W. Bush signed a change in tax policy that benefitted owners of professional sports franchises. What was that change?

A

Made certain professional sports franchise intangibles tax deductible

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19
Q

Why were there tax benefits in the KKR IPO? Why we’re similar tax benefits not obtained in Facebook’s IPO?

A

Tax benefits from stepping up the tax basis of KKR’s assets. Facebook was a C corporation pre-IPO, so such benefits were unavailable to Facebook

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20
Q

In week #3, double taxation was discussed at some length. In what valuation situations should you consider double taxation?

A
  1. Sale of privately held company (income shifted out of business to owner)
  2. Sale of a subsidiary involved in intercompany transactions in which income is shifted from one subsidiary to another
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21
Q

I.R.C. 754

A

Provides for a step-up in tax basis in the assets of a partnership

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22
Q

Approximately how much as a percentage of deal value were the tax benefits that Southwest expected to realize as a result of its acquisition of AirTran?

A

About 8-10%

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23
Q

What is the tax basis in a taxable stock sale without a 338(h)(10) election?

A

Carryover basis

i.e. when acquirer takes on target’s tax basis

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24
Q

Is goodwill tax deductible in a carryover transaction?

A

No

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25
Q

What tax basis will acquirer have with a 338(h)(10) election?

A

Step up basis

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26
Q

What is acquired in a reverse triangular 368 “A” acquisition?

A

Assets

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27
Q

In a reverse triangular IRC 368 “A” acquisition, what is the requirement for a tax-free treatment with respect to the proportion of consideration that must be acquirer stock?

A

At least 80% acquirer stock

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28
Q

What types of acquirer stock can be used in a reverse triangular IRC 368 “A” acquisition?

A

Voting stock

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29
Q

Why might an acquirer be forced to do a reverse triangular 368 “A” rather than a forward triangular A?

A

The target has assets that cannot be sold (they do not transfer)

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30
Q

What is acquired in an IRC Section 368 “B” acquisition?

A

Stock

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31
Q

In IRC Section 368 “B” acquisition, what are the requirements for tax-free treatment with respect to the proportion of consideration that must be acquirer stock?

A

100% acquirer firm stock

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32
Q

In an IRC Section 368 “B” acquisition, what types of acquirer (Newco) stock can be used with this acquisition structure?

A

Must be voting stock

33
Q

IRC 338 (h) (10)

A

Taxable stock sale of a subsidiary or an S corp that is taxed like an asset sale

34
Q

IRC 386 (a)(1)(A)

A

Tax free stock for asset merger

35
Q

IRC 332

A

Allows for tax-free liquidation of corporate subsidiaries

36
Q

IRC 302(b)(1)

A

Relates to the tax treatment of stock redemptions. Stock redemptions are taxed as sales if they are not essentially equivalent to a dividend.

37
Q

What tax planning strategy did the Rolling Stones use to reduce their tax liabilities?

A

Shift ownership of their music catalog to the Netherlands

38
Q

As noted recently in the financial press, what adverse effect were some companies concerned about if and when president Obama and Congress reduce U.S. Corporate tax rates?

A

Firms with deferred tax assets will have lower GAAP earnings if corporate tax rates are reduced

39
Q

What events in the 1980s led to the U.S. Corporate alternative minimum tax?

A

A number of firms reported large GAAP earnings, but paid relatively little income tax

40
Q

What type of transaction did stamps.com complete to protect its net operating loss carryforwards?

A

NOL poison pill

41
Q

What are three market and taxpayer actions documented in the financial press, and discussed in class, that occurred in response to the re-election of President Obama and the expectation that tax rates will increase in 2010?

A

i. Increase in dividend payouts prior to 1/1/2013 (e.g. Costco, Walmart)
ii. Sell off of appreciated publicly traded equity positions prior to 1/1/2013
iii. Sale of companies by owners prior to increase in tax rates on 1/1/2013

42
Q

What did the court of appeals conclude about UPS’s tax planning strategy associated with its package insurance business in UPS v Commissioner?

A

The court of appeals reversed the tax’s court decision and concluded that the transaction was part of a bona fide profit seeking business, and therefore had a valid business purpose

43
Q

What strategy have some wealthy individuals considered in 2010 in regard to estate taxes?

A

Euthanasia (intentionally dying in 2010 so as to avoid estate taxes in 2011)

44
Q

After the IRS issued the “Wells Fargo” ruling in 2008, how much more did Wells Fargo offer for Wachovia than Citigroup had previously offered?

A

About $13bn

45
Q

Comparison of the sale of an S corp to the sale of a C corp:

What is the max price that an Acquirer will pay to acquire the target C Corp in taxable asset sale?

A

Stock Price -Asset *Factor Tc / (1-FactorTc)

46
Q

When Google bought YouTube for $1.2BN, approximately how much tax deductible goodwill was created in the transaction?

A

$0 (no tax deductible was created in the deal)

47
Q

In the AMC Partnership case, what type of entity was Colgate’s partner (the non-Merrill Lynch partner)? Why was the type of entity of this partner relevant to the contemplated tax benefits?

A

The partner was an offshore financial institution that was not subject to tax on income from the partnership. This was a critical element of the transaction.

48
Q

What type of transaction did stamps.com complete to protect its $240MM of NOLs?

A

NOL poison pill

49
Q

How much, in PV AT dollars, are the tax savings associated with preserving the target’s NOLs worth?

A
  1. Purchase price * LT tax exempt rate
  2. NOLs / #1 = 12 years
  3. # 2 * 35%
  4. Find PV of annuity using discount rate and #3 or expiration years
  5. PV * #3
  6. 12 years * value of NOLs
  7. NOLs - # 6
      • 35%
50
Q

When Google bought YouTube for $1.2BN, approximately how much tax deductible goodwill was created in the transaction?

A

$0 (no tax deductible was created in the deal)

51
Q

In the AMC Partnership case, what type of entity was Colgate’s partner (the non-Merrill Lynch partner)? Why was the type of entity of this partner relevant to the contemplated tax benefits?

A

The partner was an offshore financial institution that was not subject to tax on income from the partnership. This was a critical element of the transaction.

52
Q

What type of transaction did stamps.com complete to protect its $240MM of NOLs?

A

NOL poison pill

53
Q

How much, in PV AT dollars, are the tax savings associated with preserving the target’s NOLs worth?

A
  1. Purchase price * LT tax exempt rate
  2. # 1 * corp tax rate
  3. NOLs / #1 = 17 years
  4. Find PV of annuity using discount rate and #3 or expiration years
  5. PV * #2
54
Q

368 A structure: calc tax paid at time of sale.

A
  1. Determine gain (stock rec’d - taxable basis)
  2. Determine boot rec’d
  3. Determine gain recognized (lesser of gain realized or boot rec’d)
  4. Tax liability: gain recognized * 20%
55
Q

Under what circumstances does a 338 (h) (10) election make sense for the sub of a c corporation?

A
  1. Asset basis = stock basis
  2. Asset basis > stock basis
  3. Divesting parent has NOLs
  4. Stock basis > asset basis by less than tax benefit from the step up
56
Q

When is a 338 (h) (10) election sub-optimal in the sale of a subsidiary of a c corporation?

A

When stock basis > asset basis by a large amount

57
Q

What are three basic requirements necessary for the acquisition of a freestanding company to qualify as “tax-free” under IRC 368?

A
  1. Continuity of proprietary interest
  2. Continuity of business purpose
  3. Valid business purpose
58
Q

What are the requirements that must be met to make a valid 338 (h) (10) election?

A
  1. Acquirer at least 80% of the target’s stock within 12 months
  2. Target must be one of the two types (subsidiary or S corp)
  3. The election must be made jointly by the buyer and seller (target S/H in S corp case)
59
Q

Futures question: terms of license cannot be sold to another party. What acquisition structure would you recommend?

A

Reverse triangular 368 “A”. The surviving entity in the merger is Future, which is a subsidiary of Past. All of future’s assets survive and become the property of Past, indirectly.

60
Q

What is min price S/H will accept?

A 
1. Calc stock sale:
Price-S/H basis - CLCF * .2
2. Calc asset sale
a. P - S/H basis * .35 = corp tax
B. Price - corp tax = S/H distribution
C. S/H dist - S/H basis - CLCF * .2
D. S/H dist - C
E. Stock sale - asset sale 
F. E/.8.  Then / .45
G. Add f to purchase price
61
Q

Forward triangular merger

A

368 tax free structure in which the target is merged into a subsidiary of the acquirer with the acquirer sub corp surviving as a sub of the acquirer

62
Q

I.R.C. 351

A

Provides tax free treatment in corporation formation transaction

63
Q

I.R.C. 302 b 3

A

Relates to the tax treatment of stock redemptions. Redemption in complete termination of shareholder interest is taxed as a sale.

64
Q

How did worldcom/MCI reduce its state income tax liabilities?

A

It paid royalties out of states to the Delaware parent company for “management expertise” thereby reducing income in various states and shifting income to Delaware

65
Q

What did court of appeals conclude about UPS’s tax planning strategy associated with its package instance business in ups v commissioner?

A

Court reversed the tax courts decision and concluded that the transaction was part of a bona fide profit seeking business, and therefore had a valid business purpose

66
Q

What strategy have some wealthy individuals considered in 2010 in regard to estate taxes?

A

Euthanasia (intentionally dying in 2020 to avoid estate taxes in 2011).

67
Q

How much approx are the NOLs of Airtran worth to Southwest Airlines?

A

About $120mm to $125mm

68
Q

What definition under the tax law was key to the tax benefits sought by the individuals in the jade trading case?

A

The definition of a liability

69
Q

How did worldcom/MCI reduce its state income taxes, pre-bankruptcy

A

Restructured so operating subs in states paid a royalty to parent company located in Delaware, thereby shifting income out of states with positive tax rate into Delaware which has 0% tax rate

70
Q

What liability was tribune hit with prior to its acquisition activities?

A

Tax liabilities from deals done by times mirror pre-tribune acquisition

71
Q

Comparison for a corp versus c corp I ordinary income tax rate

A

35% (not 20%)

72
Q

Comparison for a corp versus c corp, part c

A

/.8 and then /.65

Stock sale then asset sale

73
Q

Comparison for a corp versus c corp, part d

A

Divide difference by .8

No 338 h 10 and W 338 h 10

74
Q

Comparison for a corp versus c corp, part e

A

Use answer from part a for a corp, c corporate matches no 338 h 10

75
Q

Step up (or down) basis equals

A

Cash (or stock) price

76
Q

Optimal divestiture question

A

Never use 20%

77
Q

Optimal divestiture question, part b

How much ATAX cash will seller revolve without 338h10?

A

Cash price - S/H basis - CLCF *.35

Cash price - answer

78
Q

Optimal divestiture question, part d

How much ATAX cash will seller receive with 338h10?

A

Cash price - tax basis of target = answer

Break out capital gain (less CLCF) and ordinary income and multiply both by 35%

Subtract from cash price

79
Q

Optimal divestiture question, part e

At what price is seller indifferent between a stock sale with or without 338(h)(10)?

A

B-D / .65 + cash price

80
Q

ADSP calculation

A

ADSP = Price + L + tax rate * (ADSP- net basis - NOL)

81
Q

Preserve NOLs

  1. How much, in PV ATAX $, are the tax savings associated with preserving the targets NOLs?
A
  1. Price * LT tax exempt rate = amount per year
  2. NOLs/ amount per year = years
  3. Amount per year * corp tax rate
  4. # 3 * PV (using Years and discount)
  5. NOLs - (amount per year * years)
  6. # 5 * corp tax rate
  7. # 6 * PV (10%, year after exp). FIRST Table!!!
  8. Add #6 + #7

Taxes (15 decks)

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