Unit I – Taxable Acquisitions
Four Basic Questions:
1. Will the buyer end up with a cost basis in property it acquires or does he end up with carryover basis?
2. Will Target Corp have to recognize gain when it transfers property in the transaction?
3. Will Target SH have to recognize gain?
4. What happens to Target Corp. tax attributes?
Advantage of doing an asset acquisition:
1) Buyer can acquire only the target assets that the buyer wants
2) To avoid liabilities
Advantage of doing a stock acquisition:
1) To acquire non-transferable assets (i.e. patents)
2) Assets might be collateral for loan (due on sale)
3) Cleaner transaction
Sale/Liquidate
A
(2)
X Stock $
Building
X
(1)
$600
Tax Consequences (A as an individual)
A:
· §331: Gain or Loss to Shareholders in Corporate Liquidations (Treated as exchanges (LTCG)).
· §334(a),(b): Basis of Property Received in Liquidation
o (a) Basis of property in hands of distribute = the FMV of such property at time of distribution.
X Corp:
· §1001: Gain or Loss on Sale/Exchange (as between X and buyer; taxable transaction)
· §336(a)-(d): Gain or Loss Recognized on Property Distributed in Complete Liquidation.
o (a) Complete liquidation treated as sale/exchange of property.
o (b) Treatment of Liabilities
o (d) No loss recognized in certain distributions to related persons (§267).
§ If not pro rata, or
§ If property is disqualified property
E&P disappears with liquidation
Liquidate/Sale
A
(2)
Building
(1)
Building $
X
Tax Consequences (A as an individual)
A
· §331: Gain or Loss to Shareholders in Corporate Liquidations (Treated as exchanges (LTCG)).
· §334(a),(b): Basis of Property Received in Liquidation
o (a) Basis of property in hands of distribute = the FMV of such property at time of distribution.
X Corp:
· §336(a)-(d): Gain or Loss Recognized on Property Distributed in Complete Liquidation.
o (a) Complete liquidation treated as sale/exchange of property.
o (b) Treatment of Liabilities
o (d) No loss recognized in certain distributions to related persons (§267).
§ If not pro rata, or
§ If property is disqualified property
Sale of Stock/Liquidate
A
(1)
X Stock
$
X
Liquidate
(2)
Tax Consequences (A as an individual)
A:
· §1001: Sale/Exchange (Excess of amount realized over adjusted basis)
B:
· §331: Gain or Loss to Shareholders in Corporate Liquidations (Treated as exchanges (LTCG)).
X: None
Extra
· §332: Complete Liquidation of Subsidiaries
o No G/L recognized on the receipt by a corp (parent) of property distributed in complete liquidation of another corp (sub).
§ §332(b): Complete liquidation only if → §1504 (80% Voting and Value Test)
· §337: Nonrecognition for Property Distributed to Parent in Complete Liquidation of Subsidiary.
o No G/L to liquidating corporation.
· §338(a): Certain Stock Purchases Treated as Asset Acquisitions.
o (a) If purchasing corp makes election, then, in the case of qualified stock purchase, the T corp –
§ 1) Shall be treated as having sold all assets at FMV in single transaction
under state law.
1) Attributes
a) Most Flexible:
i) Any type of consideration may be used, whether cash, debt, stock-for-stock, etc. (as qualified by the ‘continuity of interest’ doctrine below)
b) Target goes out of existence; Assets and Liabilities of T transfer automatically.
c) Treatment of boot §356
i) Boot. Whatever consideration was not stock is called boot, and is fully taxable when distributed to the shareholders (although not at the usual capital gains rate of 15%, but rather at the higher ordinary income rates).
(1) Assumption of liability treated as money (boot). §358(d)(1)
d) Requires consent of SHs of both P and T
i) Dissenters option (Appraisal Rights). K.S.A. 17-6712
2) Requirements
a) Party to a reorganization §368(b)
b) Continuity of Proprietary Interest. Reg. §1.368-1(e)
i) Two elements:
(1) That the target’s shareholders have stock in the buyer/new company, and
(2) A significant part, usually 50%, of the consideration was stock.
(a) Reg. 1-368-1(d)(5), ex. 1: 40% Continuity did qualify.
(b) Minnesota Tea: Stock has to consist of definite material interest.
T
Buyer
Buyer
Buyer
