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Chapter 7:Corporate Acquisitions
and Reorganizations
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CORP ACQUISITIONS & CORP ACQUISITIONS & REORGANIZATIONS REORGANIZATIONS (1 of 2)(1 of 2)
Taxable acquisition transactions Taxable vs. tax-free acquisitions Tax consequences of reorganizations Acquisitive reorganizations Divisive reorganizations
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CORP ACQUISITIONS & CORP ACQUISITIONS & REORGANIZATIONS REORGANIZATIONS (2 of 2)(2 of 2)
Other reorganization transactions Judicial restrictions on reorganizations Tax attributes Limitation on use of tax attributes Example
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Taxable Acquisition Taxable Acquisition TransactionsTransactions
Asset acquisitions Stock acquisitions w/ no liquidation Stock acquisitions w/ liquidation Stock acquisitions w/ deemed
liquidation See Table C7-1 for a summary
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Asset Acquisitions
Direct purchase of assets Target corporation
– Gain or loss and depreciation recapture are computed by selling corporation on each asset
Acquiring corporation– Basis in assets is acquisition cost
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Stock Acquisitions with No Liquidation (1 of 2)
How acquisition is accomplished– Shareholders of target corp sell their shares
directly to purchaser corp Target corp recognizes no gain/loss Target corp s/hs recognize gain/loss
– Payment to a s/h for a noncompete agreement is ordinary income to s/h
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Stock Acquisitions with No Liquidation (2 of 2)
Purchaser corp consequences– Purchaser has a new subsidiary– Basis in target stock is acquisition cost
»Purchaser’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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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 Deemed Liquidation (1 of 3)
How acquisition is accomplished– Shareholders of target corp sell their
shares directly to purchaser corp
– 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 Deemed Liquidation (2 of 3)
Target corp recognizes & losses on “pretend” sale of assets to itself– Subject to depreciation recapture
Target corp’s basis in its assets are stepped up (or down)– Sales price calculated on next slide
Target’s old tax attributes wiped out– New elections are made
See Topic Review C7-1 for summary
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Stock Acquisitions with Deemed Liquidation (3 of 3)
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 stockL: Target’s liabilities other tax liab for saleTR: Applicable federal income tax rate
B: Adjusted basis of asset(s) deemed sold
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Taxable vs. Tax-free Taxable vs. Tax-free AcquisitionsAcquisitions (1 of 2) (1 of 2)
Use of cash and debt for acquisition produce tax liability
Use of stock and limited cash or debt probably produce tax-free acquisition
Primary tax impact is on the seller See Topic Reviews C7-2 & C7-3
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Taxable vs. Tax-free Taxable vs. Tax-free AcquisitionsAcquisitions (2 of 2) (2 of 2)
FASB adopted SFAS No. 141– Pooling method no longer GAAP– Only purchase method allowed for GAAP for
business combinations initiated after June 30, 2001.
FASB adopted SFAS No. 142– Goodwill no longer amortized for GAAP
»Tested for impairment
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Tax Consequences of Tax Consequences of ReorganizationsReorganizations
Target or transferor corporation Acquiring or transferee corporation Shareholders & security holders
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Target or Transferor Corporation
No gain/loss on asset transfer Assets retain depreciation recapture
potential Assumption of generally does not trigger
gain recognition No gain/loss on distribution of stock and
securities as part of reorg plan
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Acquiring or Transferee Corporation
No gain/loss recognized when it receives assets in tax-free reorg
Carryover basis of qualifying property– Gain recognized lesser of gain realized or
FMV of nonqualified property received Carryover holding period
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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 plan– Gain recognized lesser of gain realized
or cash plus FMV of other property received
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Shareholders & Security Holders (2 of 2)
Basis of stocks & securities received
Adjusted basis in stocks & securities
+ Gain recognized on the exchange
- Money & FMV of other property received
= Basis of nonrecognition property received
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Acquisitive Acquisitive ReorganizationsReorganizations
Acquiring corp obtains part or all of assets or stock of a target corp
Tax consequences Type A: Merger or consolidation Type B: Stock for stock exchange Type C: Assets for stock Type D: Asset for stock Type G: Bankruptcy
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Tax Consequences
Acquiring corporation– Does 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
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Type A: Merger or Consolidation
Merger– One company liquidates
Consolidation– Both companies liquidate and a new third
company emerges Triangle merger
– Acquiring corp uses a controlled subsidiary to actually acquire target
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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 used
– Except for acquiring fractional shares and payment of certain expenses of target
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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 consideration– Substantially all means 70% of FMV of gross
assets & 90% of FMV of net assets Target liquidates itself
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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 consideration– Substantially all means 70% of FMV of
gross assets & 90% of FMV of net assets
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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 transfer– Control 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 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 ReorganizationsDivisive 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 reorganizations– Split-off– Spin-off– Split-up
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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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Other Reorganization Other Reorganization TransactionsTransactions (1 of 2) (1 of 2)
Type E: Recapitalization– Reshuffling 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 Other Reorganization TransactionsTransactions (2 of 2) (2 of 2)
Type F: Administrative change– A mere change in identity, form or state of
incorporation– Assets 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 Judicial Restrictions on ReorganizationsReorganizations
Continuity of proprietary interest Continuity of business enterprise Business purpose Step transaction doctrine Substance over form
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Tax AttributesTax Attributes
Tax attributes follow assets Acquiring 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 Limitation on Use of Tax AttributesAttributes (1 of 2) (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
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Limitation on Use of Tax Limitation on Use of Tax AttributesAttributes (2 of 2) (2 of 2)
§383 restricts tax credit and capital loss carryovers if §382 applies– Restrictions 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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ExampleExample(1 of 4)(1 of 4)
Thomas Corp transfers all assets and part of its liabilities to Andrews Corp. for $600K of Andrews ComStk. Following the merger, Thomas is liquidated
Thomas’ basis in assets $475K Liabilities transferred $100K
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ExampleExample(2 of 4)(2 of 4)
What is Thomas’ recognized gain or loss?
Gain realized: $700K - $475K = $225K Boot received: $0 Recognized Gain: $0
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ExampleExample(3 of 4)(3 of 4)
What is Andrews’ basis for 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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ExampleExample(4 of 4)(4 of 4)
What if Thomas’ basis had been $750K?
Recognized loss: $ 0 Basis (carryover): $750K Distribution gain or loss: $ 0
