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Tax 4022/5022 Federal Income Tax II Corporate Acquisitions Chapter: None Dr. Robert R. Oliva Professor and Chairperson Department of Accounting University.

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Presentation on theme: "Tax 4022/5022 Federal Income Tax II Corporate Acquisitions Chapter: None Dr. Robert R. Oliva Professor and Chairperson Department of Accounting University."— Presentation transcript:

1 Tax 4022/5022 Federal Income Tax II Corporate Acquisitions Chapter: None Dr. Robert R. Oliva Professor and Chairperson Department of Accounting University of Arkansas at Little Rock

2 Corporate Acquisitions I. Taxable AcquisitionsI. Taxable Acquisitions II. Non-Taxable Acquisitions: ReorganizationsII. Non-Taxable Acquisitions: Reorganizations

3 Taxable Acquisitions

4 Introduction I. ASSET ACQUISITIONI. ASSET ACQUISITION II. STOCK ACQUISITIONII. STOCK ACQUISITION

5 ASSET ACQUISITION (not a reorganization): Two possibilities:Two possibilities: –(1) A. Purchasing Corporation (P) buys assets from Target Corporation (T)A. Purchasing Corporation (P) buys assets from Target Corporation (T) B. T liquidates cash from sale of assets to T’s shareholdersB. T liquidates cash from sale of assets to T’s shareholders –(2) A. T liquidates assets to its shareholders andA. T liquidates assets to its shareholders and B. P buys assets from T’s shareholdersB. P buys assets from T’s shareholders

6 Tax effect Two levels of taxation: corporate and shareholderTwo levels of taxation: corporate and shareholder –If so, P takes a cost AB –P could avoid the corporate-level tax on a stock purchase, but AB will be c/o.

7 Allocation Sale of assets of a going business requires allocationSale of assets of a going business requires allocation Buyers and sellers have conflicting interests.Buyers and sellers have conflicting interests.

8 Seller Seller’s gain or loss and character may depend on how the sales price is allocated.Seller’s gain or loss and character may depend on how the sales price is allocated. –Favor allocation to assets yielding capital gains.

9 Buyer Buyer’s AB and depreciation depends on how sales price is allocated.Buyer’s AB and depreciation depends on how sales price is allocated. –Favor allocation of sales price to depreciable assets

10 Price allocations may be contractually specified, or may be imposed by IRC. IRC 1060: Review it and its regulationsIRC 1060: Review it and its regulations

11 IRC 1060 Where there is no agreement between the parties, or if there is one, IRS finds allocation not appropriate.Where there is no agreement between the parties, or if there is one, IRS finds allocation not appropriate. Outlines specific allocation method for applicable assets acquisitions.Outlines specific allocation method for applicable assets acquisitions. Applicable asset acquisitions: Direct or indirect transfers of trade or business assets, where buyer’s (transferre) AB is determined by price paid for assets.Applicable asset acquisitions: Direct or indirect transfers of trade or business assets, where buyer’s (transferre) AB is determined by price paid for assets.

12 Treas. Reg : Allocate as in Treas. Reg : 7 classes of assetsAllocate as in Treas. Reg : 7 classes of assets – (a)(1): Adjusted grossed-up basis (AGUB) is allocated among target's “acquisition date assets.” Target’s assets held at the beginning of the day after the acquisition date. Reg § (c)(2).Target’s assets held at the beginning of the day after the acquisition date. Reg § (c)(2).

13 7 classes of assets Class I: cash, savings accounts, checking accounts, but not CDs.Class I: cash, savings accounts, checking accounts, but not CDs. –If Class I assets exceed AGUB, new target immediately realizes ordinary income in the amount of the excess. Classes II through VII:Classes II through VII: –In proportion to, and not in excess of, their fair market value:

14 Class II - VII: In proportion to, and not in excess of, their fair market value: –Class II: CDs, foreign currency; US gov secs; publicly traded stock (not of target’s affiliate); actively traded personal property –Class III: mark-to-market assets and some debt instruments Exceptions: debt instruments issued by related parties; contingent debt; convertible debtExceptions: debt instruments issued by related parties; contingent debt; convertible debt –Class IV: Inventory –Class V: Not in any of the classes above or below: furniture, buildings, land, actively traded T’s affiliate stock –Class VI: IRC 197 intangibles o/t goodwill and going concern value –Class VII: goodwill and going concern value.

15 Method of allocation Asset by asset, starting first with I and down.Asset by asset, starting first with I and down. On the basis of FMV.On the basis of FMV. See Treas. Reg (d): Example 2.See Treas. Reg (d): Example 2.

16 STOCK ACQUISITION

17 Stock Acquisition P buys stock of T from T’s shareholders.P buys stock of T from T’s shareholders. If T is closely held, negotiation may be face to face.If T is closely held, negotiation may be face to face. But likely to be different if T is publicly or widely held.But likely to be different if T is publicly or widely held.

18 Either way: T’s shareholders recognize gain(loss)T’s shareholders recognize gain(loss) P takes a cost ABP takes a cost AB

19 Kimbell-Diamond’’s transitory ownership doctrine Some stock purchases had been treated as asset acquisitions when the stock purchase was followed by a liquidation of Target into Parent.Some stock purchases had been treated as asset acquisitions when the stock purchase was followed by a liquidation of Target into Parent. –Codified into IRC 334(b)(2): Asset’s AB = c/s AB if 80% acquired by purchase w/i 12 month and plan of liquidation adopted w/i 2 years after acquiring control –However, in 1982: IRC 334(b)(2) was repealed

20 IRC 338: “Qualified stock purchase” (QSP) Replaced IRC 334(b)(2)Replaced IRC 334(b)(2) Qualified purchase (control) requirementQualified purchase (control) requirement Time requirementTime requirement Timely election requirementTimely election requirement

21 The IRC 338 election Actual election: IRC 338(a)Actual election: IRC 338(a) –“… if a purchasing corporation makes an election … in the case of a qualified stock purchase…. ” Deemed election: IRC 338(e)Deemed election: IRC 338(e) – “… a purchasing corporation … treated as having made an election (the deemed election) … if … during the consistency period… acquires any asset of the target…. ”

22 “purchasing corporation”: IRC 338(d)(1) one which makes a QSP of another corporation.one which makes a QSP of another corporation.

23 “target corporation”: IRC 338(d)(2) one whose stock is acquired through a QSPone whose stock is acquired through a QSP

24 QSP: IRC 338(d)(3) One or a series of transactions, where the purchasing corporation (not an individual) acquires by purchaseOne or a series of transactions, where the purchasing corporation (not an individual) acquires by purchase “sufficient target stock”“sufficient target stock” during a “12-month acquisition period”during a “12-month acquisition period”

25 How to “purchase” stock:IRC 338(h)(3)(a), (b) Taxable stock “purchase” from an unrelated party.Taxable stock “purchase” from an unrelated party. –Not by gift, inheritances, or tax-free/carry- over basis transactions. –Purchases by affiliates of purchaser are included –Effect of redemptions are included, e.g., redeeming of minority shareholders to bring purchasing corporation to 80%.

26 “Purchase” does NOT include stock acquisition from persons whose stock will be attributed to purchasing corporation: IRC 338(h)(3)(A)(iii)persons whose stock will be attributed to purchasing corporation: IRC 338(h)(3)(A)(iii) –e.g., cant buy from yourself Apply IRC 318(a) ignoring option attribution.Apply IRC 318(a) ignoring option attribution.

27 Exception: Acquisitions from persons that are “related corporations” DO consider acquisitions from a related corporation if 50% or more of stock of related corporation was acquired by “purchase”.DO consider acquisitions from a related corporation if 50% or more of stock of related corporation was acquired by “purchase”. “related corporation”: IRC 338(h)(3)(C)(iii): if stock owned by a related corporation treated as owned by the acquiring corporation.“related corporation”: IRC 338(h)(3)(C)(iii): if stock owned by a related corporation treated as owned by the acquiring corporation.

28 Second element: “sufficient target stock” > 80% of the voting power and> 80% of the voting power and > 80% of the value of all classes of stock> 80% of the value of all classes of stock –except nonvoting, nonparticipating preferred stock, that is not counted for the > 80% test.

29 Third element: “12-month acquisition period”: IRC 338(h)1) “12 month” is a moving parameter, ending on “acquisition date”.“12 month” is a moving parameter, ending on “acquisition date”.

30 Acquisition date/First day “acquisition date”: the first day of the acquisition period that took P into an 80% ownership by purchase. It is not necessarily the last day of the 12-month period.“acquisition date”: the first day of the acquisition period that took P into an 80% ownership by purchase. It is not necessarily the last day of the 12-month period. First day of 12 month period: Look back 12 month from acquisition date.First day of 12 month period: Look back 12 month from acquisition date.

31 The election Who makes it?Who makes it? When is it made?When is it made? How is it made?How is it made? What is the effect of the election?What is the effect of the election?

32 Who makes it? By PBy P But there is a special case where T joins in the election.But there is a special case where T joins in the election.

33 When is it made? Must be made on or before the 15th day of the 9th month beginning after the month during which the 80% control is satisfied.Must be made on or before the 15th day of the 9th month beginning after the month during which the 80% control is satisfied.

34 How is it made? File Form 8023 (Corporate Qualified Stock Purchase Election) with P’s IRS Service CenterFile Form 8023 (Corporate Qualified Stock Purchase Election) with P’s IRS Service Center

35 What is the effect of the election? IrrevocableIrrevocable Effect on TargetEffect on Target Effect on PurchaserEffect on Purchaser

36 Effect on Target the “target” is treated as two: the “target” is treated as two: –the Old Target –the New Target

37 Effect on Old Target: IRC 338(a)(1) Old Target treated as having sold ALL of its assets at FMV at the end of the day considered as the “acquisition date”.Old Target treated as having sold ALL of its assets at FMV at the end of the day considered as the “acquisition date”. –Recognize gain or loss on the deemed sale Use any tax attributes to offset gains; unused attributes are extinguished.Use any tax attributes to offset gains; unused attributes are extinguished. Recognize income earned to acquisition date-if not included in consolidated return.Recognize income earned to acquisition date-if not included in consolidated return.

38 Thus, a disadvantage: there could be significant up-front tax coststhere could be significant up-front tax costs

39 But there may not be up-front tax costs Old Target may be able to use NOLs, which otherwise may be wasted, to offset recognized gains on the deemed sale.Old Target may be able to use NOLs, which otherwise may be wasted, to offset recognized gains on the deemed sale. –In turn provided stepped-up AB to New Target.

40 At what price did the Old Target sell its assets? IRC 338(a)(1): At FMVIRC 338(a)(1): At FMV But: Treas. Reg (a): At the “aggregate deemed sales price” (ADSP)But: Treas. Reg (a): At the “aggregate deemed sales price” (ADSP)

41 “aggregate deemed sales price” (ADSP): (b) ADSP: determined at the beginning of the day after the “acquisition date”ADSP: determined at the beginning of the day after the “acquisition date” –grossed up amount realized on the sale to the purchasing corporation of the purchasing corporation’s recently purchased stock (RPS), and –liabilities (including taxes from gain recognition in 338 election)

42 “Grossed up amount realized”: (c)(1) Amount realized on the sale to P of the RPS / % of T stock, by value, attributable to the RPS stockAmount realized on the sale to P of the RPS / % of T stock, by value, attributable to the RPS stock Less selling costsLess selling costs

43 Example: (c)(2) Voting c/s; Pfd stock (not taken into account for > 80% test)Voting c/s; Pfd stock (not taken into account for > 80% test) P buys c/s from 3 different parties when 100% FMV is $1250, and pfd FMV = $750:P buys c/s from 3 different parties when 100% FMV is $1250, and pfd FMV = $750: –From S1: 40% for $500; selling costs = $40 –From S2: 20% for $225; selling costs = $35 –From S3: 20% for $275; selling costs = $25

44 What is the “grossed up amount realized”? Amount realized on the sale to P of the RPS = $1000Amount realized on the sale to P of the RPS = $1000 % of T stock, by value, attributable to the RPS stock = $1000/(FMV c/s $ FMV pfd $750) = 50% of T stock, by value, attributable to the RPS stock = $1000/(FMV c/s $ FMV pfd $750) = 50% Selling costs = $100Selling costs = $100 Hence: GUAR: $1000/.50 - $100 = $1900Hence: GUAR: $1000/.50 - $100 = $1900

45 Note: About liabilities In previous example there were no liabilities other any tax liability to be incurred by the deemed sale.In previous example there were no liabilities other any tax liability to be incurred by the deemed sale.

46 Example (1) in Treas. Reg (g)(1): 1 of 4 One asset (IRC 1245 property), bought for $80K (recomputed AB), AB = $50,400, FMV = $100,000. P purchases all 100% of the stock for $75,000One asset (IRC 1245 property), bought for $80K (recomputed AB), AB = $50,400, FMV = $100,000. P purchases all 100% of the stock for $75,000 ADSP = GUAR + L + MTR (ADSP-AB)ADSP = GUAR + L + MTR (ADSP-AB)

47 Example (1) continues: (2 of 4): GUAR Amount realized on the sale to P of the RPS / % of T stock, by value, attributable to the RPS stock = $75,000/1.00Amount realized on the sale to P of the RPS / % of T stock, by value, attributable to the RPS stock = $75,000/1.00 Selling costs = $0Selling costs = $0 Hence: GUAR: $75,000/ = $75,000Hence: GUAR: $75,000/ = $75,000

48 Example (1) continues: (3 of 4): Solving for ADSP in ADSP = GUAR + L + MTR (ADSP- AB) ADSP = $75, (ADSP - $50,400)ADSP = $75, (ADSP - $50,400) ADSP = 75, ADSP - 17,136ADSP = 75, ADSP - 17,136 ADSP ADSP = $57,864ADSP ADSP = $57,864 ADSP = 57,864/0.66 = $87,672.73ADSP = 57,864/0.66 = $87, As ADSP < FMV of asset, then entire ADSP is allocated to the 1245 propertyAs ADSP < FMV of asset, then entire ADSP is allocated to the 1245 property

49 End result in example (1): (4 of 4) Thus: Gain = 87, ,400 = 37,272.73Thus: Gain = 87, ,400 = 37, But since 1245 property:But since 1245 property: –$80,000 - $50,400 = $29,600 ordinary income –37, ,600 = $7, capital gain

50 Example (2) in Treas. Reg (g)(1): 1 of 5 P buys all stock for $140,000P buys all stock for $140,000 Other:Other: –T’s Liabilities (other than the tax for deemed sale gain) = $50K –Cash (Class I) = $10K –Marketable securities (Class II) = FMV $10K, AB $4K –Goodwill (Class VII) = AB $3K

51 EXAMPLE (2) continues: 2 of 5 Class V assets: Total FMV = $250,000Class V assets: Total FMV = $250,000 –Land: FMV $35K, AB $5K, 14% of Class V FMV –Building: FMV $50K, AB $10K, 20% of Class V –Equipment A: FMV $90K, AB 5K, recomputed AB $80K, 36% of Class V –Equipment B: FMV $75K, AB $10K, recomputed AB $20K, 30%of Class V

52 EXAMPLE (2) continues: 3 of 5 Issue is the allocation to Class V; allocate Class I and II their FMV or $10 K +$10KIssue is the allocation to Class V; allocate Class I and II their FMV or $10 K +$10K ADSP (V) = [G - (I + II)] + L + MTR [(Class I gain) + ADSP (V) - (5K+10K+5K+10K)]ADSP (V) = [G - (I + II)] + L + MTR [(Class I gain) + ADSP (V) - (5K+10K+5K+10K)] ADSP (V) = [(Class I: $10K FMV - $4K AB) +(ADSP (V) -30K)]ADSP (V) = [(Class I: $10K FMV - $4K AB) +(ADSP (V) -30K)]

53 EXAMPLE (2) continues: 4 of 5 ADSP (V) = [(6K) + (ADSP(V) - 30K)] = 170, , ADSP - 10,200ADSP (V) = [(6K) + (ADSP(V) - 30K)] = 170, , ADSP - 10,200 ADSP (V) ADSP (V) =161,840; ADSP = $161,840/0.66 = $245,212.12ADSP (V) ADSP (V) =161,840; ADSP = $161,840/0.66 = $245, As $245,212 does not exceed total Class V’s FMV of $250K, there is no ADSP balance to be allocated to goodwill, resulting in a capital loss of $3K.As $245,212 does not exceed total Class V’s FMV of $250K, there is no ADSP balance to be allocated to goodwill, resulting in a capital loss of $3K.

54 EXAMPLE (2) continues: 5 of 5: Final allocation of Class V ADSP(V)= [G - (I +II)] + L + MTR {(II- AB) +[ADSP(V)-AB] + [ADSP(VII)-AB]}ADSP(V)= [G - (I +II)] + L + MTR {(II- AB) +[ADSP(V)-AB] + [ADSP(VII)-AB]} ADSP(V) = ( ) {[10-4] +[ADSP(V) -30] +[0-3]}ADSP(V) = ( ) {[10-4] +[ADSP(V) -30] +[0-3]} ADSP(V) = ADSP(V) +0.34( ) = ADSP(V)ADSP(V) = ADSP(V) +0.34( ) = ADSP(V) ADSP(V) ADSP(V) = $160, 820; ADSP(V)= $160, 820/.66 = $243,667ADSP(V) ADSP(V) = $160, 820; ADSP(V)= $160, 820/.66 = $243,667

55 Tax effect: –Land: 0.14(243667) - 5K AB = 34, K =$29, capital gain –Building: 0.20(243667)-$10KAB = 48, K = $38, capital gain –Equipment A: 0.36(243667)-$5k = k = $82,720 gain: $75K OI; $7,720 capital –Equipment B: 0.30(243667)-$10K= 73,100K -10K = 63,100K gain: $10K OI; $53,100 capital gain

56 Other advantages or planning opportunities: The IRC 338(h)(10) electionThe IRC 338(h)(10) election

57 IRC 338(h)(10) election: If Target is a subsidiary in a consolidated group and Target’s stock is sold by the group to P,If Target is a subsidiary in a consolidated group and Target’s stock is sold by the group to P, an election will treat the transaction as if seller (consolidated group)an election will treat the transaction as if seller (consolidated group) –had a taxable sale of the Target’s assets and then –liquidated sales’ proceeds into parent in an IRC 332 liquidation

58 Good idea when Target’s assets have declined in value, and/orTarget’s assets have declined in value, and/or seller has a low basis in target’s stock (requiring recognition of large amount of gains), orseller has a low basis in target’s stock (requiring recognition of large amount of gains), or seller has tax attributes to offset gain recognized on the deemed sale of assets.seller has tax attributes to offset gain recognized on the deemed sale of assets.

59 End result of IRC 338(h)(10) election to consolidated group Gain recognition?Gain recognition? Target’s tax attributes?Target’s tax attributes?

60 Gain recognition? Consolidated group recognizes gain on the deemed sale of assets, to the extent not sheltered by any consolidated tax attributes.Consolidated group recognizes gain on the deemed sale of assets, to the extent not sheltered by any consolidated tax attributes. Consolidated group does not recognize gain on the sale of T’s stock.Consolidated group does not recognize gain on the sale of T’s stock.

61 Target’s tax attributes? Because it is treated as a IRC 332 liquidation Target’s tax attributes survive to the consolidated group.Because it is treated as a IRC 332 liquidation Target’s tax attributes survive to the consolidated group. T must electT must elect

62 Election by T? Actually a joint election in Form 8023.Actually a joint election in Form First, P has to decide to make the IRC 338 election.First, P has to decide to make the IRC 338 election.

63 Effect on New Target: IRC 338(a)(2) New Target treated as having purchased ALL of the Old Target’s assets at FMV at the beginning of the day after “acquisition date”.New Target treated as having purchased ALL of the Old Target’s assets at FMV at the beginning of the day after “acquisition date”. Main effect: Old Target recognizes gain, New Target gets higher AB.Main effect: Old Target recognizes gain, New Target gets higher AB. –New Target treated as if it bought the assets of the Old Target for the “adjusted grossed- up basis”.

64 “adjusted grossed-up basis”(AGUB): 338(b)(1); Grossed-up basis of “recently purchased stock”, plusGrossed-up basis of “recently purchased stock”, plus actual (historical) basis of the “nonrecently purchased stock”, plusactual (historical) basis of the “nonrecently purchased stock”, plus liabilities (including tax liability from gain recognition due to election)liabilities (including tax liability from gain recognition due to election)

65 “non-recently purchased stock” (N-RPS) Target’s stock held by puchaser on acquisition date that is not “recently purchased stock”, e.g., was purchased during other than the “12 month acquisition period”Target’s stock held by puchaser on acquisition date that is not “recently purchased stock”, e.g., was purchased during other than the “12 month acquisition period” Thus, the actual historical AB of the stock in the hands of P.Thus, the actual historical AB of the stock in the hands of P.

66 Election to step up AB of N- RPS to FMV P may elect to increase AB of N-RPS to FMV by treating the N-RPS as if it were sold on “acquisition date” and recognize gain accordingly.P may elect to increase AB of N-RPS to FMV by treating the N-RPS as if it were sold on “acquisition date” and recognize gain accordingly.

67 “recently purchased stock” (RPS): IRC 338(b)(6) Target’s stock held by puchaser on acquisition date that was purchased during “12 month acquisition period”Target’s stock held by puchaser on acquisition date that was purchased during “12 month acquisition period”

68 “grossed-up basis” of RPS: IRC 338(b)(4) Formula in textbookFormula in textbook AB of RPS [ (100% - %N-RPS)/% RPS ]AB of RPS [ (100% - %N-RPS)/% RPS ]

69 Allocation of AGUB:Allocation under IRC 338 pursuant to Treas. Reg : 7 classes of assets7 classes of assets

70 7 classes of assets Class I: cash, savings accounts, checking accounts, but not CDs.Class I: cash, savings accounts, checking accounts, but not CDs. –If Class I assets exceed AGUB, new target immediately realizes ordinary income in the amount of the excess. Classes II through VII:Classes II through VII: –In proportion to, and not in excess of, their fair market value:

71 Class II - VII: In proportion to, and not in excess of, their fair market value: –Class II: CDs, foreign currency; US gov secs; publicly traded stock (not of target’s affiliate); actively traded personal property –Class III: mark-to-market assets and some debt instruments Exceptions: debt instruments issued by related parties; contingent debt; convertible debtExceptions: debt instruments issued by related parties; contingent debt; convertible debt –Class IV: Inventory –Class V: Not in any of the classes above or below: furniture, buildings, land, actively traded T’s affiliate stock –Class VI: IRC 197 intangibles o/t goodwill and going concern value –Class VII: goodwill and going concern value.

72 Failure to make election P’s AB of T’s stock= purchase price of T’s stockP’s AB of T’s stock= purchase price of T’s stock AB of T’s assets remain unchangedAB of T’s assets remain unchanged T’s tax attributes survive (as limited)T’s tax attributes survive (as limited)

73 If T is liquidated under IRC 332 w/o IRC 338 election no gain or loss to P or Tno gain or loss to P or T c/o AB of all T’s assetsc/o AB of all T’s assets c/o of tax attributesc/o of tax attributes Note: IRC 269: T’s liquidation w/i 2 years, any deductions denied.Note: IRC 269: T’s liquidation w/i 2 years, any deductions denied.

74 II. Non-Taxable Acquisitions: Reorganizations Some in Chapter 20Some in Chapter 20

75 Agenda I. Type of reorganizationsI. Type of reorganizations II. Definitions and rationaleII. Definitions and rationale III. Legal requirementsIII. Legal requirements –Common Law –Statutory

76 I. Types of reorganization Acquisitive reorganizations: A, B, C types and variationsAcquisitive reorganizations: A, B, C types and variations Divisive reorganizations: IRC 355 and D type.Divisive reorganizations: IRC 355 and D type. Nonacquisitive, non-divisive reorganizations: E, F and GNonacquisitive, non-divisive reorganizations: E, F and G

77 II. Definitions and Rationale

78 Definitions Narrow: IRC 368 reorganizationNarrow: IRC 368 reorganization Broad; Corporate rearrangement where Target’s (T) assets are transferred to Acquiring (A) corporation through acquisition of assets and stock and/or creation of a new or a surviving corporation.Broad; Corporate rearrangement where Target’s (T) assets are transferred to Acquiring (A) corporation through acquisition of assets and stock and/or creation of a new or a surviving corporation.

79 Tax rationale for a tax-free transaction Assets remain in a corporate solutionAssets remain in a corporate solution Substantial continuation of the traditional business (if S/S; not if boot)Substantial continuation of the traditional business (if S/S; not if boot) Ability to pay tax on transaction (cashing in)Ability to pay tax on transaction (cashing in)

80 Business rationale for reorganizations Growth: vertically or horizontallyGrowth: vertically or horizontally Economies of scaleEconomies of scale DiversificationDiversification Divesture: Voluntary or InvoluntaryDivesture: Voluntary or Involuntary

81 III. Legal requirements

82 IIIA. Common law requirements 1. Continuity of Propietary Interest1. Continuity of Propietary Interest 2. Continuity of Business Enterprise2. Continuity of Business Enterprise 3. Business Purpose3. Business Purpose

83 IIIA1. Continuing Propietary Interest (CPI): Rationale DevelopmentDevelopment

84 Rationale for CPI No statutory (IRC) requirement.No statutory (IRC) requirement. Recognize gain when investor liquidates interest, not before.Recognize gain when investor liquidates interest, not before. –If Target’s shareholders receive cash and notes only, they cashed out (sold) their interest. –Treas. Reg (b): bottom of Permissible: voting stock; nonvoting stock.Permissible: voting stock; nonvoting stock.

85 However, as in IRC 351, a mere change of form of holding the equity interest in the Target is not a sufficient change in investment interest. as in IRC 351, a mere change of form of holding the equity interest in the Target is not a sufficient change in investment interest.

86 When is CPI at issue? Not in B and C reorganizations. BecauseNot in B and C reorganizations. Because –B: voting stock for voting stock –C: At least 80% is voting stock. Thus, only at issue in an “A” type and its derivations.Thus, only at issue in an “A” type and its derivations.

87 Development Courts have required an undefined minimum of equity interest, based on facts and circumstances.Courts have required an undefined minimum of equity interest, based on facts and circumstances. IRS: To request a PLR, Target’s shareholders must receive > 50% of the stock of Acquiring corporation.IRS: To request a PLR, Target’s shareholders must receive > 50% of the stock of Acquiring corporation. –However, IRS no longer issuing PLR’s.

88 So how much stock should be kept to satisfy CPI? > 50% of the stock of Acquiring corporation> 50% of the stock of Acquiring corporation

89 Post-Merger Sales: How long must CPI exist? Step transaction issue?Step transaction issue?

90 Step Transaction doctrine A “first” transaction intrinsically tied, through a commitment, to a “second” transaction”.A “first” transaction intrinsically tied, through a commitment, to a “second” transaction”. Transactions are dependent on each other.Transactions are dependent on each other.

91 Examples: RR 66-23: To be “cold”: at least 5 yearsRR 66-23: To be “cold”: at least 5 years But see Treas. Reg (e)(1)(i); (e)(6) Example 1.But see Treas. Reg (e)(1)(i); (e)(6) Example 1.

92 IIIA2. Continuity of Business Enterprise (CBE) Defined by Treasury Regulation: (d)Defined by Treasury Regulation: (d) Judicial responseJudicial response IRS positionIRS position Mostly important in divisive type (IRC 355 spin-offs or split-ups).Mostly important in divisive type (IRC 355 spin-offs or split-ups).

93 Defined by Treasury Regulation: (d) A (issuing corporation) mustA (issuing corporation) must –continue T’s historic business, or –use a significant portion of T’s historic business assets in a business (d)(2); (3) (d)(2); (3)

94 Examples: (d)(5)

95 IRS position: CBE Failure: RR 87-76: Prior to merger T was required to divest itself of historical assets and invests proceeds in munis.CBE Failure: RR 87-76: Prior to merger T was required to divest itself of historical assets and invests proceeds in munis.

96 So how much of the historic business assets should be used? At least 33%At least 33%

97 IIIA3. Business Purpose DefinitionDefinition –There must be a direct and substantial business or corporate purpose for the reorganization; personal purpose is irrelevant. Gregory v Helvering (1935)Gregory v Helvering (1935)

98 Identity of parties A = TPA = TP B = UMCB = UMC X stock = shares of MSCX stock = shares of MSC C = Averil Corp.; created on 9/18; received 1000 shares of MSC on 9/21; 9/24 spinned off on 9/24 pursuant to recently enacted reorganization provision; liquidated on 9/25C = Averil Corp.; created on 9/18; received 1000 shares of MSC on 9/21; 9/24 spinned off on 9/24 pursuant to recently enacted reorganization provision; liquidated on 9/25

99 Gregory v Helvering (1935) Facts: A owned B which held X stock. A wanted the X stock and in one week:Facts: A owned B which held X stock. A wanted the X stock and in one week: –B created C and transferred X stock. –B spinned off all of C to B’s shareholder, e.g, A. –C liquidated and A received X stock. –A argued strict compliance with statute and that personal motivation was irrelevant.

100 Holding COA and USSC agreed with IRS: a reorg is for the benefit of a corporation, requiring a business purpose and not a personal purpose.COA and USSC agreed with IRS: a reorg is for the benefit of a corporation, requiring a business purpose and not a personal purpose.

101 IRS attacks Liquidation/ReincorporationLiquidation/Reincorporation Avoidance/Evasion: IRC 269Avoidance/Evasion: IRC 269

102 IIIB. Statutory requirements 1. Acquisitive reorganizations:1. Acquisitive reorganizations: –(a) A reorga. –(b) B reorg. –(c) C reorg. 2. Divisive reorganizations:2. Divisive reorganizations: –(a) IRC 355 –(b) D reorg. 3. Nonacquisitive, non-divisive reorganizations: E, F and G3. Nonacquisitive, non-divisive reorganizations: E, F and G

103 IIIB1a. Acquisitive reorganizations: A Type: DefinitionDefinition Merger vs consolidationMerger vs consolidation AdvantagesAdvantages DisadvantagesDisadvantages VariationsVariations –Triangular Mergers –Reverse Triangular Mergers

104 Definition Two or more corporation combine into one corporation.Two or more corporation combine into one corporation. –Survivor: Statutory Merger: approval of majority of T and A –New corporation: Consolidation

105 Note: Acquiring corporation acquires 100% of the Target’s assets and100% of the Target’s assets and 100% of the Target’s liabilities100% of the Target’s liabilities –including contingent liabilities and –unknown liabilities

106 Advantages Flexibility of consideration: anything as long as CPI satisfied.Flexibility of consideration: anything as long as CPI satisfied. –B requires voting stock –C requires voting but permits limited amount of other consideration Flexibility as to amount of T’s assets to be acquiredFlexibility as to amount of T’s assets to be acquired Flexibility to have a subsequent transfer to A’s controlled subsidiaryFlexibility to have a subsequent transfer to A’s controlled subsidiary

107 Disadvantages State and federal law complianceState and federal law compliance Dissenters’ appraisal rightsDissenters’ appraisal rights Assumption of T’s liabilitiesAssumption of T’s liabilities –may need to have a variation (reverse triangular) if assets cant be transferred to A. Getting majority approvalGetting majority approval Target’s contractual rights or privileges may not be transferable, and expire.Target’s contractual rights or privileges may not be transferable, and expire.

108 Variations: Getting around disadvantages Forward triangular/forward subsidiary mergerForward triangular/forward subsidiary merger Reverse TriangularReverse Triangular –Using subsidiaries

109 Forward Triangular or Forward Subsidiary Merger: IRC 368(a)(2)(D) –T merged into A’s subsidiary –A’s subsidiary uses A’s voting or non-voting stock (> 50%) to acquire SUBSTANTIALLY ALL of T’s ASSETS- no liabilities. 70% of FMV of T’s gross assets70% of FMV of T’s gross assets 90% of FMV of T’s net assets90% of FMV of T’s net assets –No need to have majority of A approve, only majority of A’s subsidiary, e.g., A’s BOD, and majority of T’s shareholders.

110 Thus large latitude in “boot” gain to be recognized by those who receive boot

111 Problems avoided: T’s liabilities may or may not be assumed.T’s liabilities may or may not be assumed. Majority vote of A shareholders is not required.Majority vote of A shareholders is not required. Liberal rules for consideration to be paidLiberal rules for consideration to be paid

112 Reverse Triangular: IRC 368(a)(2)(E) –A’s sub merged into T –Variety of B reorg: A must use A’s voting stock to acquire a controlling interest in T from T’s shareholders –A does not have to acquire T’s liabilities. –T survives under A’s control: holding its and A’s sub properties. –Rationale: Retain T’s identity or public image; T may have nontransferable rights.

113 Note: B variety b/c A must use A’s voting stock to acquire 80% of T from T’s shareholders B variety b/c A must use A’s voting stock to acquire 80% of T from T’s shareholders A does not have to assume Target’s liabilitiesA does not have to assume Target’s liabilities

114 Problems avoided T remains aliveT remains alive A does not want to pay solely voting stockA does not want to pay solely voting stock T’s liabilities may or may not be assumed.T’s liabilities may or may not be assumed. no need to transfer target’s assets that were desirable but not transferable.no need to transfer target’s assets that were desirable but not transferable.

115 Acquisitive Reorganizations: B and C reorganizations:

116 IIIB. Statutory requirements 1. Acquisitive reorganizations:1. Acquisitive reorganizations: –(a) A reorga. –(b) B reorg. –(c) C reorg. 2. Divisive reorganizations:2. Divisive reorganizations: –(a) IRC 355 –(b) D reorg. 3. Nonacquisitive, non-divisive reorganizations: E, F and G3. Nonacquisitive, non-divisive reorganizations: E, F and G

117 Agenda IIIB1(b): Acquisitive reorganizations: BIIIB1(b): Acquisitive reorganizations: B IIIB1(c): Acquisitive reorganizations: CIIIB1(c): Acquisitive reorganizations: C

118 IIIB1(b). Acquisitive reorganizations: B Type: Summary: Acquiring Corp wants Target’s stock (not the assets)Summary: Acquiring Corp wants Target’s stock (not the assets) (1) The elements(1) The elements (2) Advantages and disadvantages(2) Advantages and disadvantages

119 IIIB1(b)(1) The B reorganization: (I) Nature of the transaction(I) Nature of the transaction –Acquiring corporation must use “solely voting stock” to acquire “control” of Target. (II) “Solely voting stock”: Acquiring’s voting stock for the Target’s stock necessary to control T(II) “Solely voting stock”: Acquiring’s voting stock for the Target’s stock necessary to control T (III) “Control”(III) “Control”

120 IIIB1(b)(1)(I) Nature of the transaction Transaction is between Acquiring Corporation and Target’s shareholders.Transaction is between Acquiring Corporation and Target’s shareholders. –Acquiring makes a “tender offer” to Target’s shareholders to acquire the Target’s voting stock in exchange for Acquiring’s voting stock Thus, after the transaction Acquiring and Target shareholders own Acquiring Corporation, which in turn is “in control” of Target Corporation.Thus, after the transaction Acquiring and Target shareholders own Acquiring Corporation, which in turn is “in control” of Target Corporation.

121 IIIB1(b)(1)(II) Voting stock

122 Issues regarding “voting stock” Acquisition must be with “voting stock”Acquisition must be with “voting stock” –Defining “voting stock” ClassClass –Exceptions Exceptions to exceptionsExceptions to exceptions –# of acquiring transactions Note that Acquiring may use other consideration to acquire Target’s debt securities.Note that Acquiring may use other consideration to acquire Target’s debt securities.

123 If there was an acquisition of stock, was the Target stock acquired with “voting stock”? “class” (common or preferred) is immaterial as long as it is “voting” stock.“class” (common or preferred) is immaterial as long as it is “voting” stock. –“voting”: unconditional right to vote on regular corporate decisions

124 What is not Acquiring’s “voting stock”? Convertible bonds, even if convertible into voting stockConvertible bonds, even if convertible into voting stock Options to purchase “voting stock”Options to purchase “voting stock” Stock rights and warrantsStock rights and warrants –b/c they are like options to purchase –But contractual rights to receive (not to purchase) may qualify.

125 Exceptions to “voting stock” rule Cash in lieu of fractional sharesCash in lieu of fractional shares Cash to pay for target corporation’s legal, accounting, appraisal, and other reorganization expenses.Cash to pay for target corporation’s legal, accounting, appraisal, and other reorganization expenses. –But not the target’s shareholders’ expenses Pre-reorg redemptions of dissenting minorityPre-reorg redemptions of dissenting minority

126 Redemptions of dissenting minority Redemptions of dissenting minority OK if before B reorg: Target (not Acquiring Corp) may redeem minority dissenters’ stock for cash or other property prior to B reorg.OK if before B reorg: Target (not Acquiring Corp) may redeem minority dissenters’ stock for cash or other property prior to B reorg. Not as clear if after B reorg: If the redemption is performed by the Acquiring Corp, it is OK if there was NO predetermined agreement about the redemption prior to the B reorg.Not as clear if after B reorg: If the redemption is performed by the Acquiring Corp, it is OK if there was NO predetermined agreement about the redemption prior to the B reorg.

127 How many transactions involved in the acquisition of T’s stock? It does not matter how many transactions as long asIt does not matter how many transactions as long as –stock was acquired solely for voting stock –the “control” element is satisfied.

128 If > one transaction, and one of them was not “solely for stock” of Acquiring corporation? Are the acquisitions “related” or are they separate transactions?Are the acquisitions “related” or are they separate transactions? Facts and circumstances.Facts and circumstances. –Time is a factor Simplest solution: Acquiring unconditionally sells purchased stock to 3rd party before entering into B reorg.Simplest solution: Acquiring unconditionally sells purchased stock to 3rd party before entering into B reorg.

129 IIIB1(b)(III) The “control” element “Control” is to be determined at the end of the acquisition.“Control” is to be determined at the end of the acquisition. –immediately after the transaction It permits previous acquisitions to be considered.It permits previous acquisitions to be considered. But all must be “solely for voting stock”But all must be “solely for voting stock”

130 But how much before? Regs: 12 months is OKRegs: 12 months is OK But judicially: The issue is whether the transactions are “related”.But judicially: The issue is whether the transactions are “related”. –Facts and circumstances. –The longer the period between the transactions, the greater they are found “unrelated”.

131 The meaning of 80% control: IRC 351 control ownership of 80% of total combined voting powerownership of 80% of total combined voting power 80% of each class of nonvoting stock80% of each class of nonvoting stock

132 IIIB1(b)(2) Advantages and Disadvantages of B reorganizations

133 Advantages Target survivesTarget survives –Immediate liquidation will make it a C reorganization –Acquiring Corp’s assets are shielded from the target’s liabilities Nonassignable rights remain with TargetNonassignable rights remain with Target Tax attributes remain with TargetTax attributes remain with Target

134 Advantages of B reorganizations (2 of 3) No asset acquisition problems:No asset acquisition problems: –transfer fees –state and local income taxes –recordkeeping

135 Advantages of B reorganizations (3 of 3) Unlike C: Acquiring Corp is not required to keep substantially all of its assetsUnlike C: Acquiring Corp is not required to keep substantially all of its assets Unlike A: Not dependent on local lawUnlike A: Not dependent on local law –No need for a shareholder’s vote –Tender offer to target shareholders does not require approval of Target’s management

136 Disadvantages of B reorganizations (1) Only voting stock: dilutes control of Acquiring’s original shareholdersOnly voting stock: dilutes control of Acquiring’s original shareholders Potential for dissenters’ problems at shareholders’ meetingPotential for dissenters’ problems at shareholders’ meeting Tax attributes remain in TargetTax attributes remain in Target

137 IIIB1(c) Acquisitive reorganizations: C

138 Acquisitive reorganizations: C (1) Summary(1) Summary (2) The elements(2) The elements (3) Advantages and disadvantages(3) Advantages and disadvantages

139 IIIB1(c)(1)Summary

140 Substantially all of Target Corp’s assets for Acquiring Corp’s “voting stock”Substantially all of Target Corp’s assets for Acquiring Corp’s “voting stock”

141 Target must distribute to its shareholders property received form Acquiring Corp and property not transferred to Acquiring Corp.Target must distribute to its shareholders property received form Acquiring Corp and property not transferred to Acquiring Corp. –Target is effectively liquidated

142 Similar to a “statutory merger” or “practical merger”Similar to a “statutory merger” or “practical merger” –In C reorg: substantially all assets are transferred –In merger: All assets are transferred.

143 Ends with Acquiring corp being owned by its original shareholders and the Target’s original shareholders.Ends with Acquiring corp being owned by its original shareholders and the Target’s original shareholders.

144 IIIB1(c)(2) Elements Substantially all the Target’s assetsSubstantially all the Target’s assets Consideration to be paid: solely voting stockConsideration to be paid: solely voting stock Distribution requirementDistribution requirement

145 Substantially all the Target’s assets Not defined in the IRCNot defined in the IRC For advanced ruling:For advanced ruling: –Higher of 70% of gross assets and 90% of net assets must be acquired But other interpretations permit it if all significant operating assets have been transferred to the Acquiring Corp.But other interpretations permit it if all significant operating assets have been transferred to the Acquiring Corp.

146 Consideration “Solely” voting stock“Solely” voting stock Unlike an A type where anything is almost OK.Unlike an A type where anything is almost OK. But here it is “solely” with a twist (boot relaxation rule)But here it is “solely” with a twist (boot relaxation rule) –Must use solely voting stock to pay up to 80% of FMV of Target’s assets. –Thus 20% boot is OK.

147 The 20% boot and liabilities assumed As assets are being transferred that may have debt attached to them, disregard Acquiring Corp’s assumption of Target’s liability.As assets are being transferred that may have debt attached to them, disregard Acquiring Corp’s assumption of Target’s liability. However, assumed liabilities are considered “boot” for purposes of the 20%.However, assumed liabilities are considered “boot” for purposes of the 20%.

148 Example: Assume that the FMV of Target assets is $100 and you want to have a C reorg: If liabilities assumed = $18; may use up to $2 in real boot.If liabilities assumed = $18; may use up to $2 in real boot. If liabilities assumed = $19; may use up to $1 in real boot.If liabilities assumed = $19; may use up to $1 in real boot. If liabilities assumed = $20; may not use any boot.If liabilities assumed = $20; may not use any boot. If liabilities assumed = $21; may not use any boot.If liabilities assumed = $21; may not use any boot.

149 The point is that substantial liabilities may be assumed as long as there is a CPI.The point is that substantial liabilities may be assumed as long as there is a CPI. But little “real boot” can be used when liabilities are being assumed.But little “real boot” can be used when liabilities are being assumed. It is like the “basis” rules in IRC 351 where liability is considered “money received ” for basis only but not boot.It is like the “basis” rules in IRC 351 where liability is considered “money received ” for basis only but not boot.

150 However, depending on the reason for the liabilities, assumption may be considered “real boot” If the liability assumed is a payment to be made to dissenting shareholders, the payment of the liability is considered a transfer of cash to the Target, e.g., “real boot”.If the liability assumed is a payment to be made to dissenting shareholders, the payment of the liability is considered a transfer of cash to the Target, e.g., “real boot”.

151 Distribution requirement Target must distribute promptly to its shareholders all the voting stock and boot received from Acquiring Corp.Target must distribute promptly to its shareholders all the voting stock and boot received from Acquiring Corp. Target must also distribute any assets not transferred to the Acquiring CorpTarget must also distribute any assets not transferred to the Acquiring Corp –All Acquring needs to acquire is “substantially all” the assets, the other assets must be distributed. –Target must not engage in an active T/B

152 Exception to distribution requerement; IRC 368(a)(2)(G)(ii) IRS may waive it ifIRS may waive it if –(1) it would result in a substantial hardship and –(2) the Target and shareholders agree to be treated as if the Target had made the distribution of the undistributed assets and the shareholders contributed back to the Target.

153 IIIb1(c)(3) Advantages of C reorg No need to assume all the Target’s liabilities (A and B does).No need to assume all the Target’s liabilities (A and B does). No need to acquire all the assets.No need to acquire all the assets. No need to have Acquiring shareholders agree to the transaction. Only the Target and its shareholders have to approve the acquisition and likely liquidation.No need to have Acquiring shareholders agree to the transaction. Only the Target and its shareholders have to approve the acquisition and likely liquidation.

154 The B reorganization followed by liquidation Treated as a C reorganizationTreated as a C reorganization Issue: Were substantially all of the target’s assets acquired in the reorg?Issue: Were substantially all of the target’s assets acquired in the reorg? –Were there any spin offs immediately before the attempted B reorg?

155 Forward Triangulars; Reverse Triangulars Already discussedAlready discussed

156 Disadvantages of C reorg Substantial transfer costs associated with the transfer of assets.Substantial transfer costs associated with the transfer of assets. –likely to sustain a tax at the state level. Substantially all of the target’s assets must be acquired.Substantially all of the target’s assets must be acquired. –Precludes a spin-off of unwanted business or assets before/immediately after reorg Boot ignored by assumption of liabilitiesBoot ignored by assumption of liabilities

157 Aquisitive Reorganizations: Tax implications

158 Introduction A TypeA Type B TypeB Type C typeC type

159 A Type: Acquiring Target’s assets Tax consequences to Target shareholdersTax consequences to Target shareholders Tax consequences to Acquiring corporationTax consequences to Acquiring corporation Tax consequences to Target corporationTax consequences to Target corporation Tax consequences to Acquiring corporation shareholdersTax consequences to Acquiring corporation shareholders

160 Tax consequences to Target shareholders IRC 354: nonrecognitionIRC 354: nonrecognition IRC 356: recognitionIRC 356: recognition IRC 358: basisIRC 358: basis

161 IRC 354(a)(1): No gain or loss recognized shall be recognized if stocks or securities in a corporation a party to a reorganizationstocks or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization,are, in pursuance of the plan of reorganization, exchanged solely for stock or securitiesexchanged solely for stock or securities –in such corporation or –in another corporation a party to the reorganization

162 Exceptions: IRC 354(a)(2) Principal amount of securities received > principal amount of securities surrenderedPrincipal amount of securities received > principal amount of securities surrendered

163 IRC 356(a)(1): Gain on exchange If 354 would apply but for the fact that the property received also included cash and other property (“boot”), thenIf 354 would apply but for the fact that the property received also included cash and other property (“boot”), then recognize gain up to the cash and the FMV of the other property, e.g, the boot.recognize gain up to the cash and the FMV of the other property, e.g, the boot. But no loss is recognized.But no loss is recognized.

164 Character of the recognized gain capitalcapital dividenddividend

165 IRC 356(a)(2): Dividend If the exchange has the effect of a dividend distribution, pursuant to IRC 318(a), then recognize as dividend income the ratable share of EP.If the exchange has the effect of a dividend distribution, pursuant to IRC 318(a), then recognize as dividend income the ratable share of EP.

166 “Effect of a dividend distribution”? IRC 302 analysisIRC 302 analysis Constructive rulesConstructive rules If 302(b)(1) [NEED] or 302(b)(2) [Sub. Disprop. Red.]: Then no dividend effect.If 302(b)(1) [NEED] or 302(b)(2) [Sub. Disprop. Red.]: Then no dividend effect. Typical end result: < 50% shareholder getting boot will get capital gain.Typical end result: < 50% shareholder getting boot will get capital gain.

167 IRC 302 analysis requires Make believe merger was a 100% stock for stock followed by a postmerger redemption of an amount of stock equal to the boot received.Make believe merger was a 100% stock for stock followed by a postmerger redemption of an amount of stock equal to the boot received.

168 Therefore, realized gain is recognized if Other than stock and securities is received, e.g, cash, bootOther than stock and securities is received, e.g, cash, boot Principal received > Principal surrenderedPrincipal received > Principal surrendered Securities were received and no securities surrenderedSecurities were received and no securities surrendered

169 IRC 358(a)(1): Basis of nonrecognition property to distributees: Carry-over basis Less:Less: –other property received (boot) –cash received (boot) –loss recognized Plus:Plus: –dividend received (recognized as income) –gain recognized

170 IRC 358(a)(2): Basis of “other property” received: IRC 358(a)(2): Basis of “other property” received: FMVFMV

171 Holding period: Nonrecognition property: tackedNonrecognition property: tacked Other property: new holding periodOther property: new holding period

172 See Example 17.3 (p. 838)

173 Tax consequences to Acquiring corporation

174 Gain (loss) not recognized IRC 1032(a): No gain(loss) on issuance of stock.IRC 1032(a): No gain(loss) on issuance of stock.

175 Basis: IRC 362(b) Carryover basis for transferor’s assets, increase by gain recognized by transferor.Carryover basis for transferor’s assets, increase by gain recognized by transferor. As usually no gain or loss recognized recognized by Target transferor, acquired assets move to Acquiring corporation at c/o basis.As usually no gain or loss recognized recognized by Target transferor, acquired assets move to Acquiring corporation at c/o basis.

176 NOTE who is the “Transferor”: The Target corporation Target shareholders ARE NOT the “transferors” of assets.Target shareholders ARE NOT the “transferors” of assets. Target shareholders may recognize gain b/c “boot” received but that does not increase AB of Acquiring Corporation.Target shareholders may recognize gain b/c “boot” received but that does not increase AB of Acquiring Corporation.

177 Other: HP: carryover to Acquiring Corporation (tacked)HP: carryover to Acquiring Corporation (tacked) Target’s tax attributes: carryover to Acquiring CorporationTarget’s tax attributes: carryover to Acquiring Corporation

178 Tax consequences to Target corporation IRC 361(a): No gain(loss) to a party of the reorganization when itIRC 361(a): No gain(loss) to a party of the reorganization when it –exchanges property pursuant to a plan, –solely for stock and securities –in another corporation party to the reorganization.

179 Target does not recognize Receipt of “boot”Receipt of “boot” Assumption of target’s liabilitiesAssumption of target’s liabilities

180 Distributions by Target:

181 IRC 361( c)(1): No gain (loss) recognized) to a party of reorganization on distribution of property pursuant to a plan.No gain (loss) recognized) to a party of reorganization on distribution of property pursuant to a plan.

182 IRC 361( c)(4): IRC 311 does not apply to Target’s distributionsIRC 311 does not apply to Target’s distributions

183 IRC 361( c)(2): Exceptions Appreciated property distributions: recognize gain (no loss) as if sold property.Appreciated property distributions: recognize gain (no loss) as if sold property. FMV: higher of FMV or liability attached to propertyFMV: higher of FMV or liability attached to property

184 Exception to exception: “qualified property” stock, stock rights, or obligation of distributing corporationstock, stock rights, or obligation of distributing corporation stock, stock rights, or obligation of another party to the reorganization when received by distributing corporation in exchange for its assets.stock, stock rights, or obligation of another party to the reorganization when received by distributing corporation in exchange for its assets.

185 Typical end result for Target: No gain (loss) on distribution of Acquiring Corp’s stock and securitiesNo gain (loss) on distribution of Acquiring Corp’s stock and securities Little or no gain (loss) on distribution of boot received from Acquiring Corp b/c AB is picked up at FMV.Little or no gain (loss) on distribution of boot received from Acquiring Corp b/c AB is picked up at FMV.

186 Acquiring Corporation Shareholders Tax effect: None, where Acquiring survives, there is no change in the tax status of its shareholders.Tax effect: None, where Acquiring survives, there is no change in the tax status of its shareholders. Non-tax effect: They own smaller share of company because some of it is owned by Target’s shareholders.Non-tax effect: They own smaller share of company because some of it is owned by Target’s shareholders.

187 B Type Tax consequences to Target shareholdersTax consequences to Target shareholders Tax consequences to Acquiring corporationTax consequences to Acquiring corporation Tax consequences to Target corporationTax consequences to Target corporation Tax consequences to Acquiring corporation shareholdersTax consequences to Acquiring corporation shareholders

188 Tax consequences to Target shareholders IRC 354(a)(1): No gain or loss recognizedIRC 354(a)(1): No gain or loss recognized Carryover AB and HPCarryover AB and HP If boot received, then recognize realized gain up to the boot.If boot received, then recognize realized gain up to the boot. –AB of stock = c/o - FMV boot + gain recognized –AB of boot = FMV of boot

189 Tax consequences to Acquiring corporation IRC 1032: No gain (loss) for issuance of voting stock.IRC 1032: No gain (loss) for issuance of voting stock. AB; HP: carryoverAB; HP: carryover AB when target is publicly held: OK to use sampling and estimating statistical techniques.AB when target is publicly held: OK to use sampling and estimating statistical techniques. Target’s tax attributes c/o to Acquiring Corp; limitations: laterTarget’s tax attributes c/o to Acquiring Corp; limitations: later

190 Tax consequences to Target corporation Remains in existence; tax attributes intactRemains in existence; tax attributes intact No gain (loss) recognized on exchange of assets for S/S of Acquiring, nor on the distribution of that S/S to target’s shareholders.No gain (loss) recognized on exchange of assets for S/S of Acquiring, nor on the distribution of that S/S to target’s shareholders. Gain is recognized for distribution of appreciated property that is not “qualified”.Gain is recognized for distribution of appreciated property that is not “qualified”. Target year ends on the date of the asset transfer: IRC 381(b)Target year ends on the date of the asset transfer: IRC 381(b)

191 Tax consequences to Acquiring corporation shareholders IRC 1032: No gain (loss) for issuance of voting stock.IRC 1032: No gain (loss) for issuance of voting stock.

192 C Type: Same as a B Type

193


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