Transcript Asset versus Stock Acquisitions Nontax issues

Asset versus Stock Acquisitions
Nontax issues
Known and potential liabilities of target
corporation
 Rights and benefits associated with target’s
legal entity


Negotiation with target management vs. target
shareholders
14-1
Taxable Asset Acquisitions
Two options:
Direct asset purchase without liquidation of target
 Direct asset purchase with liquidation of target or
merger

Recall tax consequences:
Target recognizes gain/loss on sale of assets
 If acquisition is a merger or target liquidates,
target shareholders recognize gain/loss on
disposition of their target stock
 Acquiring corporation takes a tax basis in targets
assets equal to their purchase price
14-2

Taxable Stock Acquisitions
Tax consequences without Sec. 338
election:

Target recognizes no gain/loss

Tax basis of target assets is not affected (no step-up
or step-down to FMV)
Target shareholders recognize gain/loss on
disposition of their target stock
 Acquiring corporation takes a tax basis in target
stock equal to purchase price

14-3
Taxable Stock Acquisitions
continued
Tax consequences with Sec. 338 election:

Target recognizes gain/loss as though its assets
were sold for ‘aggregate deemed sale price’
Tax basis of target assets is stepped-up or down to
aggregate deemed sale price
 Aggregate deemed sale price = price paid for stock
+ target’s liabilities assumed + tax on basis step-up
or step-down

Target shareholders recognize gain/loss on
disposition of their stock
 Acquiring corporation takes a tax basis in target
stock equal to purchase price

14-4
Example: Taxable Acquisition
Alternatives
Acquiring corporation (A) wishes to purchase the
assets of target corporation (T) for $500,000 cash
or will pay a price for the stock of T that provides
equivalent value to T’s shareholders
T’s assets have a tax basis of $100,000
T’s shareholders have $150,000 of tax basis in
their T stock and have owned it longer than 1 year
T has no liabilities and no NOL, capital loss, or
tax credit carryforwards
14-5
Example continued
What are the tax consequences of the
acquisition to T, A, and T’s shareholders
under the 4 taxable acquisition alternatives?
Suppose that T owns the following assets:
Inventory with a tax basis of $50,000 and a
FMV of $120,000
 Personal property with a tax basis of $50,000
and a FMV of $80,000 (MACRS life of 5
years)

What future tax benefits would A receive by
stepping up the basis of T’s assets?
14-6
Example continued
Suppose that the future tax benefits of the
step up are worth $95,000
Which acquisition alternative would A
prefer? Why?
Would A’s preferences change if T had
expiring capital loss carry forwards of
$150,000? What are the tax consequences
of each alternative to A, T, and T’s
shareholders in this case?
14-7
Example continued
Refer back to the original scenario, with no
capital loss carry forward. At what price for
an asset purchase is A indifferent between
an asset purchase and a stock purchase
without a Sec. 338 election?

At this price, which option do T’s shareholders
prefer?
14-8
Strategic Issues
Determination of final price is the result of
negotiations that often ‘split’ tax costs and
benefits
Acquirer should consider tax consequences of
alternative transaction forms to the seller in
determining a competitive offer
 Choice is often between taxable and nontaxable
forms as well as between asset and stock
acquisitions

14-9
Practical Issues
How would the acquirer estimate the tax
basis of a potential target’s assets, and its
other tax attributes, to determine whether an
asset or stock purchase is desirable and
determine a competitive price?
How would the acquirer determine the tax
status of the target’s shareholders?
How would the future tax benefits of a basis
step up be determined?
14-10