Presentation is loading. Please wait.

Presentation is loading. Please wait.

Entity v. Assets: Non-Tax Agenda

Published byMerryl Roberts Modified over 6 years ago

Similar presentations

Presentation on theme: "Entity v. Assets: Non-Tax Agenda"— Presentation transcript:

1 Entity v. Assets: Non-Tax Agenda
7-1 Entity v. Assets: Non-Tax Agenda Undisclosed liability exposures Third party disruptions Third party consents Unwanted assets Sales and use taxes Insurance rating issues Closing complexities Securities law exposures Clean slate mindset Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com

2 Problem 7-A Circle Inc. 7-2 (a) Asset Sale-Liquidation Olson Inc.
$5.32 mill taxes Assets – 21.5 mill Olson Inc. Buyer Circle Inc. Seller Cash – 20 mill Liabilities – 1.5 mill Cash - $7.34 mill Cash - $7.34 mill Net After-Tax Yield Sue - $7,272,000 Doug - $5,932,000 Doug Basis 300k Sue Basis 7 Mill $1.408 mill taxes $.068 mill taxes Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com

3 Olson’s Purchase Price Allocations
7-3 Olson’s Purchase Price Allocations 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. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com

4 Potential Asset Sale Options
7-4 Potential Asset Sale Options Liquidate, Then Sell Assets: Corporate and shareholder tax on liquidation. Same after-tax net yield with more hassle due to double transfer of assets and liabilities. Cash Merger: Same tax consequences as sale-liquidation scenario. Automatic asset and liability transfers make transaction easier, but also transfers all rights and liabilities of a merger. Installment Sale: No deferral at corporate level, but tax deferral available to shareholders if plan of complete liquidation is adopted and assets sold and note distributed with 12 months following plan adoption. Asset Sale – Deferred Liquidation: Goal would be to defer shareholder gain until after Doug (age 81 now) dies and gets 1014 basis step- up before gain recognized. Corporation likely would be personal holding company in interim and would need to dividend income. Convert to S Status Before Sale: Conversion traps and “BIG” tax Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com

5 Problem 7-A Circle Inc. 7-5 (b) Stock Sale for $18 million Circle Inc.
Seller Olson Inc. Buyer Net After-Tax Yield Sue - $8,600,000 Doug - $7,260,000 Cash - 9 mill Cash - 9 mill Stock Stock Doug Basis 300k Sue Basis 7 Mill $1.740 mill taxes $.4 mill taxes Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com

6 7-6 Olson 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 corporate level tax triggered. 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 and 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. Bottom Line: Demise of General Utilities triggers double tax on nearly all asset sales and stock sales with 338 election. Hence, structure of choice often is straight stock sale with no 338 election. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com

7 Problem 7-A Circle Inc. 7-7 (c) Redemption - Stock Sale Combo
Cash - 2.7 mill Circle Inc. Seller Olson Inc. Buyer Net After-Tax Yield Sue - $5,840,000 - $3 mill equip Doug - $7,260,000 Cash mill 30% Stock Cash - 6.3 mill 70% Stock 70% Stock Doug Basis 300k 30% Stock Sue Basis 7 Mill Equipment – 3 mill $1.740 mill taxes $.46 mill taxes Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com

8 Acquisition Reorg Requirements
7-8 Acquisition Reorg Requirements Control within meaning of 368(c) – Dual 80% test. Continuity of interest – varies. Measured by nature of consideration and boot. Transfers before and after not a factor. Continuity of business enterprise. Carry-on sellers business or assets. Transfer to sub or partnership allowed Business purpose. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com

9 Acquisition Reorg Options
7-9 Acquisition Reorg Options Statutory Merger – A Reorg - Merger under state law - 50% to 60% boot allowed Stock Swap – B Reorg - No boot allowed Assets for Stock – C Reorg - Boot allowed for liabilities assumed and other boot (at 20% max) - Substantially all assets (90% net FMV) - Buyer’s stock distributed in liquidation as part of reorg. Forward Triangular Merger - Substantially all assets – same as C - Boot of A Reorg – 50% to 60% works Reverse Triangular Merger - Same as forward but boot limited to 20% Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com

10 Problem 7-A Circle Inc. 7-10 (d) Forward Triangular Merger Circle Inc.
Seller New Sub. S New Sub Survives Tax Impacts: No recognized gain or loss for any party Doug and Sue stock basis carryover to new stock New Sub gets assets carryover basis Taxable boot allowed up to 50% to 60% 100% Stock Token Assets Doug Basis 300k Buyer Stock Olson Inc. Buyer Sue Basis 7 Mill Buyer Stock Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com

11 Problem 7-A Circle Inc. 7-11 (e) Reverse Triangular Merger Circle Inc.
Seller New Sub. S Seller Survives Tax Impacts: No recognized gain for any party Doug and Sue stock basis carryover to new stock New Sub gets assets carryover basis Taxable boot can’t exceed 20% 100% Stock Token Assets Doug Basis 300k Buyer Stock Olson Inc. Buyer Sue Basis 7 Mill Buyer Stock Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com

12 Problem 7-A Circle Inc. 7-12 (f) S Corp Asset Sale-Liquidation
Zero taxes Assets – 21.5 mill Olson Inc. Buyer Circle Inc. Seller S Corp Cash – 20 mill Liabilities – 1.5 mill Cash - $10 mill Cash - $10 mill Net After-Tax Yield Sue - $9,450,000 Doug - $8,450,000 Doug Basis 3 Mill Sue Basis 8 Mill $1.55 mill taxes $.55 mill taxes Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com

13 Problem 7-A (f) – Tax Computations
7-13 Problem 7-A (f) – Tax Computations Doug Sue Corporate 1.5 mill ordinary income mill mill Corporate 11.8 mill capital gain mill mill Stock basis before gain adjustment mill mill Increase in basis for income from sale mill mill Tax Basis after income adjustment mill mill Liquidation Proceeds mill mill Capital gain (loss) on liquidation mill (4.65) mill Aggregate capital gain mill mill Tax on capital 20% mill mill Tax on ordinary 40% mill mill Total taxes mill mill Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com

14 Agreement Key Components
7-14 Agreement Key Components Representations and warranties Limitations on representations and warranties Covenants pending closing Covenants post closing Conditions Legal opinions Indemnifications Due diligence Executive protections Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com

Download ppt "Entity v. Assets: Non-Tax Agenda"

Similar presentations

McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc Principles of Taxation: Advanced Strategies Chapter 13 Business Liquidations and.

McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc Principles of Taxation: Advanced Strategies Chapter 13 Business Liquidations and.
Corporate & Partnership Tax - Instructor: Dwight Drake Check The Box Game Pre – 1997 - Big fear was taxable as C corp association - The 6-4 structuring.

Corporate & Partnership Tax - Instructor: Dwight Drake Check The Box Game Pre – Big fear was taxable as C corp association - The 6-4 structuring.
Taxable Acquisitions  The transaction is taxable because most, if not all, consideration is cash. Consequently, the deal will not qualify as non-taxable.

Taxable Acquisitions  The transaction is taxable because most, if not all, consideration is cash. Consequently, the deal will not qualify as non-taxable.
7-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall.

7-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall.
Buying, Selling and Transitioning a Business: Increase your ROI with Thoughtful Tax Planning September 18, 2012 Kevin Kaiser, Lindquist & Vennum Mark Salsbury,

Buying, Selling and Transitioning a Business: Increase your ROI with Thoughtful Tax Planning September 18, 2012 Kevin Kaiser, Lindquist & Vennum Mark Salsbury,
Tax-free* Acquisitions of Freestanding C Corporations Basic types: IRC §368(a)(1)(A)— Statutory merger IRC §368(a)(1)(B)— Stock-for-stock acquisition IRC.

Tax-free* Acquisitions of Freestanding C Corporations Basic types: IRC §368(a)(1)(A)— Statutory merger IRC §368(a)(1)(B)— Stock-for-stock acquisition IRC.
Problem 4-B: Lucy’s C Corp Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com.

Problem 4-B: Lucy’s C Corp Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com.
Module 14 Transactions Between a Corporation and Its Shareholders.

Module 14 Transactions Between a Corporation and Its Shareholders.
Individual Income Taxes C14-1 Chapter 14 Property Transactions: Determination of Gain or Loss and Basis Considerations Property Transactions: Determination.

Individual Income Taxes C14-1 Chapter 14 Property Transactions: Determination of Gain or Loss and Basis Considerations Property Transactions: Determination.
LLM Corporate Tax Instructor: Dwight Drake Asset Sale Old Corp Buyer Old Corp Stockholders Stock cancelled In liquidation Business Assets Cash, notes Cash,

LLM Corporate Tax Instructor: Dwight Drake Asset Sale Old Corp Buyer Old Corp Stockholders Stock cancelled In liquidation Business Assets Cash, notes Cash,
Corporate & Partner Tax Instructor: Dwight Drake Two Liquidation Modes Corp Shareholders Corp Corporate Assets Stock Cancelled Straight Liquidation Mode.

Corporate & Partner Tax Instructor: Dwight Drake Two Liquidation Modes Corp Shareholders Corp Corporate Assets Stock Cancelled Straight Liquidation Mode.
Corporate & Partner Tax Instructor: Dwight Drake Partnership Liquidation 731 & 732 731: No gain or loss recognized to partner unless: - Gain to extent.

Corporate & Partner Tax Instructor: Dwight Drake Partnership Liquidation 731 & : No gain or loss recognized to partner unless: - Gain to extent.
LLM Corporate Tax Instructor: Dwight Drake SU Corp. Problem 177 (a) Zane (a) C distributes to Z inventory – FMV 20k, basis 11k. - C Corp has gain of 9k.

LLM Corporate Tax Instructor: Dwight Drake SU Corp. Problem 177 (a) Zane (a) C distributes to Z inventory – FMV 20k, basis 11k. - C Corp has gain of 9k.
Corporate & Partner Tax Instructor: Dwight Drake ```````````````````````````````````````````` ```````````````````````````````````````` For 355 to Apply.

Corporate & Partner Tax Instructor: Dwight Drake ```````````````````````````````````````````` ```````````````````````````````````````` For 355 to Apply.
TAX ISSUES TO CONSIDER IN COMMON ACQUISITION SCENARIOS

TAX ISSUES TO CONSIDER IN COMMON ACQUISITION SCENARIOS
Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 3-2 Three Tax Regimes C.

Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 3-2 Three Tax Regimes C.
Chapter 3 Property Dispositions Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Chapter 3 Property Dispositions Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
Chapter 8 Corporate Formation, Reorganization, and Liquidation Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Chapter 8 Corporate Formation, Reorganization, and Liquidation Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill Companies Inc Principles of Taxation: Advanced Strategies Chapter 13 Chapter 13 Business Liquidations.

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill Companies Inc Principles of Taxation: Advanced Strategies Chapter 13 Chapter 13 Business Liquidations.
Corporate & Partner Tax Instructor: Dwight Drake Partnership Cash Distributions Cash Distributions: 1. Reduce outside basis of partner. 733. 2. No gain.

Corporate & Partner Tax Instructor: Dwight Drake Partnership Cash Distributions Cash Distributions: 1. Reduce outside basis of partner No gain.

Similar presentations

Ads by Google