Subchapter C Mergers and Acquisitions Flashcards
Taxable Asset Acquisition: Liquidation followed by SH sale consequences
Gain recognized on liquidation to SH. 336(a)
Capital gain upon SH sale to P.
SH takes FMV basis in stock because of gain and therefore recognizes no further gain on sale to P.
If P is corporation, it does not succeed to tax attributes of T.
Taxable Asset Acquisition: Sale of assets at corporate level followed by liquidation.
Gain recognized by T on sale.
Capital gain upon liquidation to SH.
P does not succeed to tax attributes of T.
Taxable Asset Acquisition: Sale of assets at corporate level not followed by liquidation.
Gain recognized by T on sale.
Gain to SH deferred.
Benefits: If current SH dies with shares, gain may be eliminated permanently.
Hazards: If no ongoing business is being conducted, it may be classified as a personal holding company under 541 and be required to distribute net investment income annually.
Amortization of Goodwill and Certain Other Intangibles
197
Section 197 intangibles may be amortized over a 15 year period.
Intangible must be acquired by and used in a business or for the production of income.
Includes intangibles such as goodwill.
Special Allocation Rules for Certain Asset Acquisitions
1060
Parties to an asset acquisition must follow basis allocation rules prescribed by the Secretary.
Once parties have agreed to allocation, they must comply with allocation unless contract is later invalid.
Parties must report allocations to ensure consistency.
Service reserves right to challenge agreed allocations.
Taxable Acquisitions: What rare circumstances would make a 338 election more desirable than a stock purchase in a taxable acquisition? (Paying a front end corporate tax to achieve tax savings later from stepped up basis)
(1) Where Target has large NOL carryovers that would be available to offset the gain recognized on the deemed asset sale; and (2) where Target is a subsidiary of another corporation.
Type A Reorganization
368(a)(1)(A) Statutory Merger or Consolidation.
Generally occurs under local state law. Typically, assets and liabilities transferred to acquiring corporation and target dissolves by operation of law. Target SH receive stock, cash, or debt instruments.
Must be acquisitive and not divisive; assets and liabilities cannot be split.
Continuity of Proprietary Interest doctrine generally requires SH of target corp to receive a proprietary interest in the acquiring corp. (Voting Stock 40% of Consideration)
Continuity of Business Enterprise doctrine generally requires acquiring corp to continue T’s historic business or to use a significant portion of T’s historic assets in a business.
Type B Reorganization
368(a)(1)(B)
Acquisition of Stock Solely for Voting Stock
P must give ONLY voting stock as consideration and receive stock that gives control (80%) of T.
Creeping acquisition can qualify if part of an integrated plan.
Type C Reorganization
368(a)(1)(C)
Acquisitions of Assets for Voting Stock
