7-1 ©2011 pearson education, inc. publishing as prentice hall
TRANSCRIPT
7-1©2011 Pearson Education, Inc. Publishing as Prentice Hall
7-2
CORP ACQUISITIONS & REORGANIZATIONS (1 of 2)
Taxable acquisition transactionsTaxable vs. nontaxable
acquisitionsTax consequences of
reorganizationsAcquisitive reorganizationsDivisive reorganizations Other reorganization transactions©2011 Pearson Education, Inc. Publishing as
Prentice Hall
7-3
CORP ACQUISITIONS & REORGANIZATIONS (2 of 2)
Judicial restrictions on reorganizations
Tax attributesLimitation on use of tax attributesExample Tax planning considerationsCompliance & procedural
considerationsFinancial statement implications
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7-4
Taxable Acquisition Transactions
Asset acquisitionsStock acquisitions w/ no
liquidationStock acquisitions w/ liquidationStock acquisitions w/ §338
deemed sale electionSee Table 1 for a summary
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7-5
Asset Acquisitions
Direct purchase of assetsTarget corporation
Gain or loss and depreciation recapture are computed by selling (target) corporation on each asset
Acquiring corporationBasis in assets is acquisition cost
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7-6
Stock Acquisitions with No Liquidation (1 of 2)
How acquisition is accomplishedShareholders of target corp sell
their shares directly to purchaser corp
Target corp recognizes NO gain/loss
Target corp s/hs recognize gain/lossPayment to a s/h for a
noncompete agreement is ordinary income to s/h
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7-7
Stock Acquisitions with No Liquidation (2 of 2)
Purchaser corp consequencesPurchaser has a new subsidiaryBasis in target stock is acquisition
costPurchaser’s basis in target’s stock
(outside basis) may be > target’s basis in its assets
No adjustment to basis of target’s assets
Tax attributes of target transfer to purchaser
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7-8
Stock Acquisitions with Liquidation
If parent owns at least 80% of new subsidiary, liquidation is tax-free as described in Chapter 6
Premium paid (amount above target corp’s basis in its assets) is lost upon liquidation of the subsidiary
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Stock Acquisitions with §338 Deemed Sale Election
(1 of 5)
How acquisition is accomplishedShareholders of target corp sell their
shares directly to purchaser corpWithin a 12-month period
Purchaser files §338 election pretending that target has been liquidated and a new subsidiary created in its place
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Stock Acquisitions with §338 Deemed Sale Election
(2 of 5)
Target corp recognizes gains & losses on “pretend” sale of assets to itselfSubject to depreciation recapture
Target corp’s basis in its assets are stepped up (or down)Sales price calculated on slide 12
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Stock Acquisitions with §338 Deemed Sale Election
(3 of 5)
Target’s old tax attributes wiped outNew elections are made
See Topic Review 1 for summary
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Stock Acquisitions with §338 Deemed Sale Election
(4 of 5)
ADSP = G + L - (TR x B) (1 – TR)
ADSP: Adjusted deemed sale priceG: Acquiring’s grossed-up basis in the
target corporation’s recently purchased stock
L: Target’s liabilities other than tax liab for sale
TR: Applicable federal income tax rate
B: Adjusted basis of asset(s) deemed sold
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Stock Acquisitions with §338 Deemed Sale Election
(5 of 5)
Tax basis in assets after deemed saleAdjusted grossed-up basis
Sum of Recently purchased stockTarget corp’s nontax liabilitiesTarget corp’s tax liability
Allocate to 7 classes using residual method
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Taxable vs. Nontaxable Acquisitions (1 of 2)
Use of cash and debt for acquisition produce taxable acquisition
Use of stock and limited cash or debt likely produce nontaxable acquisition
Primary tax impact is on the target (corporation being acquired)
See Topic Reviews 2 & 3
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Taxable vs. Nontaxable Acquisitions (2 of 2)
Only purchase method allowed for GAAP for business combinationsASC 805 (FAS No. 141)
Goodwill not amortized for GAAPAssets recorded at FMVTested for impairmentASC 350 (FAS No. 142)
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Tax Consequences of Reorganizations
Target corporationAlso referred to as “transferor”
corpAcquiring corporation
Also referred to as “transferee” corp
Shareholders & security holders
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Target (Transferor) Corporation
No gain/loss on asset transferAssets retain depr recap
potentialAssumption of liabilities
generally does not trigger gain recognitionPossible exception for divisive
Type DNo gain/loss on distribution of
stock and securities as part of reorg plan
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Acquiring (Transferee) Corporation
No gain/loss recognized when it receives assets in tax-free reorg
Carryover basis of qualifying propertyGain recognized lesser of gain
realized or FMV of nonqualified property received
Carryover holding periodDoes not include boot©2011 Pearson Education, Inc. Publishing as
Prentice Hall
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Shareholders & Security Holders
(1 of 2)
No gain/loss on stock or securities received if exchanged solely for stock or securities as part of reorg planGain recognized lesser of gain
realized or cash plus FMV of other property receivedDividend or capital gain depending on
§302 testDividend vs. redemption
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Shareholders & Security Holders
(2 of 2)
Basis of stocks & securities received
Adjusted basis in stocks & securities given up
+ Gain recognized on the exchange- Money & FMV of other property
received= Basis of nonrecognition property
received©2011 Pearson Education, Inc. Publishing as
Prentice Hall
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Acquisitive Reorganizations
Acquiring corp obtains part or all of assets or stock of a target corp
See topic Review C7-5Tax consequencesType A: Merger or consolidationType C: Assets for stockType B: Stock for stock
exchangeType D: Asset for stockType G: Bankruptcy
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Tax Consequences
Acquiring corporationDoes not recognize gain/loss when
it receives property as part of a tax-free exchange
Acquired property has a carryover basis
Shareholders & security holders May have gain to extent
“nonqualifying” property received as part of exchange©2011 Pearson Education, Inc. Publishing as
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Type A: Merger or Consolidation
(1 of 2)
MergerOne company liquidates
ConsolidationBoth companies liquidate and a
new third company emergesTriangular merger
Acquiring corp uses a controlled subsidiary to acquire target
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Type A: Merger or Consolidation
(2 of 2)
Reverse triangular mergerAcquiring corp uses a controlled
subsidiary to acquire targetControlled subsidiary merged into
the target corporationTarget corporation becomes a
subsidiary of the parent corporation
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Type C: Assets for Stock
Acquiring corp obtains substantially all of target corp’s assets in exchange for acquiring corp’s voting stock and a limited amount of other considerationSubstantially all means 70% of FMV
of gross assets & 90% of FMV of net assets
Target liquidates itself©2011 Pearson Education, Inc. Publishing as Prentice Hall
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Type D: Asset for StockAcquisitive D (1 of 2)
Acquiring corp obtains substantially all of target corp’s assets in exchange for acquiring corp’s voting stock & other considerationSubstantially all means 70% of
FMV of gross assets & 90% of FMV of net assets
New Reg. allows acquiring corp to use as much as 60% other consideration
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Type D: Asset for StockAcquisitive D (2 of 2)
Target or target s/hs must control acquiring corp immediately after asset transferControl defined as either 50% of
voting power of voting stock or 50% of total value of all stock
Target liquidates itself
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Type B: Stock for Stock
Acquiring corp issues voting stock directly to target s/hs in exchange for shares of target
Target continues under new ownership
No other consideration can be usedExcept for acquiring fractional
shares and payment of certain expenses of target
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Type G: Bankruptcy
Part or all of target’s assets transferred to a new corp as part of a court-approved plan in a bankruptcy, receivership or similar situation
Securities of new corporation are distributed in accordance with court-approved plan
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Divisive Reorganizations
Part of corp’s assets transferred to a second corp which is owned by either the original corp or its s/hs
Divisive D reorganizationsSplit-offSpin-offSplit-up
Divisive G reorganization©2011 Pearson Education, Inc. Publishing as Prentice Hall
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Split-off
Corp transfers assets to a controlled subsidiary in exchange for sub’s stock
Sub’s stock then transferred to one or more s/hs in exchange for parent corp stock
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Spin-off
Corp transfers assets to subsidiary in exchange for sub’s stock
Parent distributes sub stock to all parent s/hs on a pro rata basis
Parent receives nothing in exchange for distribution of sub’s stock
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Split-up
Existing corp transfers all assets to two or more new controlled subs in exchange for sub stock
Parent distributes all stock of each sub to existing s/hs in exchange for all outstanding parent stock and liquidates
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Divisive G Reorganization
Existing corp transfers part of assets to a second corporation according to a court-approved plan
Transferor distributes all stock and securities to second corp to s/hs, security holders, and creditors
Transferor corp may continue business or be liquidated by the court
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Other Reorganization Transactions (1 of 2)
Type E: RecapitalizationReshuffling of corporate structure
w/in framework of existing corp” (1942 S.C.)
Must have a bona fide business purpose for reorganization
Stock for stock, bonds for stock or bonds for bonds exchanged as part of a plan
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Other Reorganization Transactions (2 of 2)
Type F: Administrative changeA mere change in identity, form or
state of incorporationAssets and liabilities of old
corporation are transferred to new corporation
All old securities are exchanged for identical new securities
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Judicial Restrictions on Reorganizations (1 of 2)
If judicial restrictions are not met, reorganization loses its tax-free statusContinuity of proprietary interest
Old owners must continue ownershipNew Reg now accepts 40% as the
continuity of interest threshold Continuity of business enterprise
Old assets must be used in new business
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Judicial Restrictions on Reorganizations (2 of 2)
Business purposeValid business purpose for
transactionStep transaction doctrine
IRS may collapse series of independent transactions if all part of a plan
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Tax Attributes
Tax attributes follow assetsNOLs, capital losses, E&P, gen.
bus. credit, inventory methodsAcquiring corp obtains control of
both assets & attributes in A, C, acquisitive D & G, and F reorgs
Asset ownership does not change in B or E reorgs
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Limitation on Use of Tax Attributes (1 of 2)
§§382 & 269 prevent assets or stock purchases if primary purpose is obtaining loss carryovers
§§382 & 269 also prevent a loss corp from purchasing a profitable corp if primary purpose is using its existing losses ©2011 Pearson Education, Inc. Publishing as
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Limitation on Use of Tax Attributes (2 of 2)
§383 restricts tax credit and capital loss carryovers if §382 appliesRestrictions similar to NOLs
§384 prevents pre-acquisition losses of either acquiring or target corp (loss corp) from offsetting BIG recognized during 5 yrs after acq. by another corp (gain corp).
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Example(1 of 4)
Thomas Corp transfers all assets and part of its liabilities to Andrews Corp. for $600K of Andrews Common stock. Following the merger, Thomas is liquidatedThomas’ basis in assets $475KLiabilities transferred $100K
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Example(2 of 4)
What is Thomas’ recognized gain or loss?Gain realized: $700K* - $475K =
$225KBoot received: $0Recognized Gain: $0
* $700K = $600K stock + $100K relief of liabilities©2011 Pearson Education, Inc. Publishing as
Prentice Hall
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Example(3 of 4)
What is Andrews’ basis in the assets?$475K (carryover)
How much gain/loss does Thomas recognize upon distribution of Andrews stock to Thomas’ shareholders?No gain or loss
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Example(4 of 4)
What if Thomas’ basis had been $750K?Recognized loss: $ 0Basis (carryover): $750KDistribution gain or loss: $ 0
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Tax Planning Considerations
Why use a reorganization instead of a taxable transaction?Target corp s/h defer gain
recognitionTarget corp exchanges assets w/out
gain recognition or depreciation recapture
Avoiding reorganization provisionsAllows acquiring corp to make §338
election
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Compliance and Procedural
Considerations
§338 electionAcquiring corp files Form 8023
Plan of reorganizationWritten plan not required, but
prudentRuling requests
May request advanced ruling from IRS on tax consequences of reorganization©2011 Pearson Education, Inc. Publishing as
Prentice Hall
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Financial Statement Implications (1 of 2)
ASC 805 (SAFS No. 141)Acquiring corp may only use
purchase method for financial statement purposes
Deferred tax accounts and treatment of goodwill depend on whether acquisition was taxable or nontaxable
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Financial Statement Implications (2 of 2)
Taxable asset acquisitionNontaxable asset acquisitionStock acquisitionPricing the acquisitionNet operating losses
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Taxable Asset Acquisition
Tax basis likely same as book basisNo deferred tax liabilities or
assetsIf tax and book goodwill are equal,
§197 amortization of goodwill creates temporary difference
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Nontaxable Asset Acquisition
Book bases differ from carryover tax bases of acquired assetsASC 850 (SFAS 109) prescribes that
acquiring corp recognize deferred tax liability/asset for book/tax differences in bases of transferred assets and liabilities
Goodwill not amortizable for taxNo temporary difference©2011 Pearson Education, Inc. Publishing as
Prentice Hall
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Stock Acquisition
Target corp remains intact as a subsidiary of acquiring corp
Adjustments under ASC 850 & 740 (SFAS 141 & 109) occur when preparing consolidated financial statements
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