Mergers and Acquisitions

Question 1

Assume you are advising a corporation (referred to as Acquiring) that is looking to acquire another corporation (referred to as Target). Further assume the following:

Target is a subsidiary of another corporation.
Acquiring could purchase either (i) 100% of the stock of Target, or (ii) 100% of Target’s assets and liabilities.
The fair market value of Target’s assets and liabilities, excluding tax issues, is approximately $1 billion.
Prior to any acquisition, the net tax basis of Target’s assets and liabilities is $600 million
Given these facts, if Acquiring purchases the stock of Target for $1 billion and a IRC 338 election is not made, the net tax basis of Target’s assets and liabilities (i.e., its inside tax basis) after the acquisition should be:

Answer 1

Correct Answer = $600 million. In a stock acquisition, the “inside” tax basis of the target will carryover unless a IRC 338 election is made.

Question 2

Target will recognize any taxable income resulting from the IRC 338(h)(10) election while it is still included in the Seller’s consolidated tax return. Thus, Seller will effectively bear any tax cost from making a 338 election.

Answer 2

True.

Question 3

Acquiring can unilaterally agree to make the IRC 338(g) election

Answer 3

True.

Question 4

True or False: If Acquiring purchases the stock of Target, Acquiring will be responsible for the contingent liabilities of Target.

Answer 4

True.

Question 5

If Acquiring purchases the assets of Target, Acquiring should generally not be responsible for the contingent liabilities of Target unless those liabilities were specifically assumed by Acquiring in the purchase.

Answer 5

True.

Question 6

Acquiring will effectively recognize the tax consequences of making the IRC 338(g) election

Answer 6

True.

Question 7

Seller and Acquiring need to agree to make the IRC 338(h)(10) election.

Answer 7

True.