1. Advising Business Owners Instructor: Dwight Drake Asset Sale Old Corp Buyer Old Corp Stockholders Stock cancelled In liquidation Business Assets Cash, notes Cash, Notes Impacts: 1. Double tax: corp and shareholder level. 2. Asset basis step-up 3. Price allocation to assets – 197 and 1060 4. Pass-thru installment sales to shareholders, not corp

2. Advising Business Owners Instructor: Dwight Drake Sub Triangular A Merger – 368(a)(2)(D) Old Corp New Sub Old Corp Stockholders Merger – Old disappear Buying Corp 100% Stock Token Assets Buyer Stock Impacts: 1.Tax free to all 2.Shareholders basis carryover 3.All corp attributes carryover 4.Key requirements: - Continuity of interest (40%) - Continuity of business enterprise

3. Advising Business Owners Instructor: Dwight Drake Purchase Price Allocations – 197, 1060 197 Anti “Soft Dollar” Rule: All intangible assets amortized over 15 years – information bases, customer lists, patient files, know-how, licenses, franchises, trade names, goodwill, going-concern value, covenants not to compete. 1060 Priority Asset Allocation Rules: Priority One: Cash or cash equivalents. Priority Two: Highly-liquid securities, foreign currencies and CDs. Priority Three: ARs, mortgages, credit card receivables. Priority Four: Inventory and dealer property Priority Five: Other tangible assets (equipment, real estate, etc.) Priority Six: Intangibles except goodwill and going concern value. Priority Seven: Goodwill and going concern value. Note: Parties can agree on values per agreement, but not change priorities.

4. Advising Business Owners Instructor: Dwight Drake Stock Sale Old Corp Buyer Old Corp Stockholders Impacts: 1. Shareholder level tax. 2. No asset basis step-up w/o 338 3. 338 gives step-up at huge cost 4. If 338, same allocation issues as asset sale 5. Installment reporting OK at shareholder level. Stock Cash, notes 338 Election?

5. Advising Business Owners Instructor: Dwight Drake 338 Election Concept: Buyer of 80% of more of stock of target corporation over 12 month period can elect to treat as asset purchase. Basis step-up, all new corp attributes, and now corporate level tax. Killer: Demise of general utility doctrine gutted any value of 338 election in most cases. Why take tax hit now to get future benefit of basis step-up? Two Survivors: 338 still works where: - Corp has big NOL can than shelter corporate level tax triggered on deemed asset sale. - Stock of sub is sold an gain on sub stock is less than gain on sub assets. Then, 338(h)(10) election, coupled with 332 and 337, may produce win-win – step-up with lower tax to parent corp than sold sub stock. Bottom Line: Demise of General Utilities triggers double tax on nearly all asset sales and stock sales with 338 election. Hence, structure of choice now in most cases is straight stock sale with no 338 election.

6. Advising Business Owners Instructor: Dwight Drake Problem 679 T Corp balance sheet – is a C Corp. A.B. FMV Cash 300k 300k Liabilities 1,000k Inventory 400k 800k Equip 300k 500k Sue stock (60k basis) 1,500k ARs 1,200k 1,200k Ray Stock (1,600k basis) 1,500k Securities 100k 200k Goodwill 0 1,000k Total 2,300k 4,000k 4,000k (a) T liquidates, all assets to shareholders pro rata, followed by asset sale to P. T Corp ordinary income 150k (inventory 50k and equip 1245 of 100k) and LTCG of 350k (250k building, 200k goodwill less 100k securities). Tax to corp 175k (35% of 500k). Balance of 1,125k assets less 300k liabilities (net 825k) to shareholders, who would have collective gain LTCG of 825k less 230k basis. For A, gain would be 362.5k (412.5k less 50k basis), which at 20% triggers tax of 72.5k.

7. Advising Business Owners Instructor: Dwight Drake Problem 17 CI corp balance sheet – is a C Corp. A.B. FMV Cash 300k 300k Liabilities 1,000k Inventory 400k 800k Equip 300k 500k Sue stock (60k basis) 1,500k ARs 1,200k 1,200k Ray Stock (1,600k basis) 1,500k Securities 100k 200k Goodwill 0 1,000k Total 2,300k 4,000k 4,000k 1. CI merge with LC, and Sue and Ray issued LC stock. No gain or loss to any party. Continuity of interest and continuity of business enterprise continues. Sue and Ray carry over tax basis to LC stock. LC pick up CI basis in all assets.

8. Advising Business Owners Instructor: Dwight Drake Problem 17 2.Assets, subject to liability, sold to LC for 3 mill as part of plan of liquidation. CI then liquidated. - Net gain to CI of 1.7 mill. At 34% rate, tax is 578k. - Net distributed to shareholders is 2,422k, 1211 to each. - Sue has 1,151k LTCG (1211k - 60k) - Ray has 389k LTCL. - LC gets full asset basis step-up 3.Same as 2, but no liquidation. Avoid shareholder tax impact, but still have full corp tax impact. Watch out for future personal holding company hit. Only possible advantage is 1014 step-up on timely death. 4.CI complete liquidation followed by sale of assets. Same result as 2, corporate and shareholder tax on liquidation.

9. Advising Business Owners Instructor: Dwight Drake Problem 17 5. LC purchases CI stock from shareholders for 3 mill and makes 338 election. - Shareholder capital gain based on 3 mill : 1,460k gain to Sue (1,500k – 60k) and 100k LTCL to Ray (1,500k – 1,600,000). - Since “qualified stock purchase” under 338 (one-shot 100% stock purchase), 338 election is deemed sale of assets from T to P. Formula for amount of purchase (“aggregate deemed sales price” or ADSP) is: ADSP = Grossed up stock price + T liabilities + [tax rate x (ADSP – T’s tax basis in deemed assets sold)] ADSP = 3,000k + 1,000k + [.35 (ADSP – 2,300k)] ADSP = 4,915,384. - CI must report gain on deemed asset sale on final return and pay tax. ADSP allocated to assets in new corp – first to non-goodwill assets per 1060 up to FMV and balance to goodwill. Why so high? LC paid too much for stock deal.

10. Advising Business Owners Instructor: Dwight Drake Problem 17 6. Straight stock sale with no 338 election. Sue and Ray have capital gain, but no other taxes due from transaction. LC picks up CI, with all its basis and tax attributes.

11. Advising Business Owners Instructor: Dwight Drake Purchase Sales Agreement -Reps and warranties -Covenants -Indemnifications -Due Diligence -Executive protection