McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc Principles of Taxation: Advanced Strategies Chapter 12 Corporate Acquisitions, Mergers

McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc

Principles of Taxation: Advanced Strategies

Chapter 12 Corporate Acquisitions, Mergers and

Divisions

Slide 12-1


Corporate Acquisitions

Asset acquisitions versus stock acquisitions Taxable acquisitions versus tax deferred

acquisitions

Slide 12-2


Asset AcquisitionsSlide 12-3

All or some of the target’s assets can be purchased

Some, all, or none of target’s liabilities assumed

May be done indirectly through a mergerAcquiring corporation “absorbs” target,

receiving all its assets and assuming all its liabilities


Stock Acquisitions

Acquiring corporation purchases controlling interest in stock of target

Target operated as a subsidiary or liquidated

Slide 12-4


Stock Acquisitions-Considerations Advantages:

Target may have nontransferable rights, management in place and name recognition

Disadvantages:Contingent liabilitiesMinority shareholders

Slide 12-5


Taxable Versus Tax Deferred Acquisition Refers to whether seller is taxable on gain Tax deferred transactions generally result in

a higher sales price since seller has no immediate tax liability

Tax deferred acquisitions often done with purchaser’s stock, a very tax efficient way to make a purchase

Slide 12-6


Acquisition Matrix Slide 12-7

Taxable asset Taxable asset AcquisitionsAcquisitions

Taxable stock Taxable stock acquisitionsacquisitions

Tax deferred asset Tax deferred asset acquisition acquisition

(A or C (A or C reorganization)reorganization)

Tax deferred stock Tax deferred stock acquisitionacquisition

(B reorganization(B reorganization


Other Considerations

Friendly acquisition can result in lowest overall tax and acquisition costs

Hostile acquisition can result in large professional and investment banking feesAcquisition expenditures must generally

be capitalized

Slide 12-8


Taxable Asset Purchases

Purchaser takes cost basis in assets A lump-sum purchase price must be

allocated to specific assets Purchaser wants to allocate as much as

possible inventory items and depreciable assets with short useful lives

Slide 12-9


Section 1060

Price allocation must be consistent between buyer and seller

Amount allocated to an asset can not exceed its fair market value

Any excess of purchase price over aggregate fair market value of operating assets allocated to goodwillGoodwill is amortizable over 15 years

Slide 12-10


Taxable Asset Sales- Target

Target may stay in existence or liquidate If corporation liquidated, shareholders must

recognize gain or loss equal to difference between proceeds and their basis in their stock

Slide 12-11


Cash Mergers Target corporation merges into acquiring

corporation. Shareholders of target receive cash

Treated as taxable sale of assets by target corporation. Gain and loss recognized by target

Shareholders of target also recognize gain or loss

Slide 12-12


Reverse Cash MergerSlide 12-13

Acquiring corporation forms subsidiary. Subsidiary merged into target. Target shareholders receive cash

No tax at corporate level Shareholders of target recognize gain or

loss


Purchase of Stock

Acquirer takes cost basis in stock No change in bases of assets to acquired

corporation

Slide 12-14


Tax Deferred Asset Acquisitions

Acquiring issues stock to target shareholders.

Target’s assets and liabilities transferred to acquiring.

Target goes out of existence

Slide 12-15


Tax Deferred Assets Acquisitions-Effects No gain or loss to target No gain or loss to shareholders of target receiving

acquiring corporation stock Shareholder’s basis in target stock become his or

her basis for acquiring corporation stock Acquiring corporation’s bases in assets acquired

from target is same as target’s bases in those same assets

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Type A Reorganizations

Merger or consolidation Must satisfy continuity of interest

To receive favorable ruling from IRS at least 50% of total consideration must be acquiring corporation stock

Gain but not loss recognized on any boot received up to gain realized

Slide 12-17


Forward Triangular Merger

Used as a way to avoid obtaining consent of acquiring corporation’s shareholders

Acquiring corporation forms new subsidiary and contributes stock to subsidiary.

Target merged into subsidiary. Target shareholders are distributed acquiring

corporation stock

Slide 12-18


Type C ReorganizationsSlide 12-19

Often referred to as a “practical merger” Acquiring corporation buys substantially all

of target’s corporations assets for acquiring corporation voting stock

Target corporation’s liabilities may be assumed

Target corporation must liquidate


Tax Deferred Stock Acquisitions

Shareholders of target corporation exchange their target stock for stock of acquiring corporation

Shareholders recognize no gain or loss Shareholder’s basis for target corporation becomes

basis of stock in acquiring corporation Target corporation does not participate in or is

affected by the transaction

Slide 12-20


Type B Reorganizations

Tax deferred stock acquisition Acquiring corporation must use solely

voting stock to acquire stock of target corporation

After transaction, acquiring corporation must own 80% of voting power of target corporation and 80% of each class of nonvoting stock

Slide 12-21


Continuity of business enterprise

Acquiring corporation must continue target corporation’s historic business or

Use a significant portion of target’s assets in a new business

Slide 12-22


Book/Tax Differences

Purchase method of accounting generally required under GAAP regardless of tax treatment

Target’s assets generally recorded at fair market value

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Survival of Target Corporation’s Tax Attributes

Slide 12-24

Taxable asset Taxable asset acquisitionsacquisitions

Acquirer cannot purchase target’s Acquirer cannot purchase target’s tax attributestax attributes

Taxable stock Taxable stock acquisitionsacquisitions

Target’s tax attributes remain in tactTarget’s tax attributes remain in tact

Tax deferred asset Tax deferred asset acquisition acquisition

(A or C reorganization)(A or C reorganization)Acquirer succeeds to target’s tax Acquirer succeeds to target’s tax attributesattributes

Tax deferred stock Tax deferred stock acquisitionacquisition

(B reorganization(B reorganizationTarget’s tax attributes are in tactTarget’s tax attributes are in tact


Net Operating Loss and Credit Carryovers May only be used against post-acquisition

income of acquirer Use of acquired net operating loss

carryovers and other favorable tax attributes subject to several limitations

Slide 12-25


Limitations on Use of Carryovers

Section 269 gives IRS power to disallow use of net operating loss or credit carryforwards if principal purpose of acquisition is evasion or avoidance of tax

Section 382 limits use of net operating loss carryforwards after a change in ownership

Slide 12-26


Section 382

Ownership change triggering statute can result from both taxable and tax deferred acquisitions

If an ownership change takes place, net operating loss carryforward that may be used in any one year is subject to the section 382 limitation

Slide 12-27


Section 382 Limitation

Represents largest amount of net operating loss that may be utilized in any one year

Equal to long term tax-exempt federal rate multiplied by value of target corporation immediately before the ownership change

Slide 12-28


Corporate Divisions

Three types:Spin-offSplit offSplit up

Slide 12-29


Spin-off

Corporation distributes stock of a subsidiary proportionately to its shareholders

Shareholders own stock in both parent and subsidiary after the transaction

Slide 12-30


Spin-off Transaction

Shareholders

P

S

S Stock

P owns S

Slide 12-31


Spin-off Post Transaction

Shareholders

p

Shareholders

S

Slide 12-32


Split off

Corporation distributes stock in a subsidiary to a group of shareholders in exchange for their stock in the parent corporationExchanging shareholders have no

ownership in parent after transaction

Slide 12-33


Split off Transaction

A B

P

S

P owns S

P distributes S stock to B

B gives up his P stock

Slide 12-34


Split off Post Transaction

A

P

B

S

A owns PB owns S

Slide 12-35


Split Up

Corporation owns one or more subsidiaries Stock of subsidiaries distributed to

shareholders who own subsidiaries directly

Slide 12-36


Split up Transaction

Shareholders

P

S1 S2

P liquidates

Slide 12-37


Split up Post Transaction

Shareholders

S1 S2

Shareholders own both S1 and S2

Slide 12-38


Tax Consequences of Corporate Division Spin off

Dividend to shareholders Split off

Redemption Split up

Liquidation

Slide 12-39


Section 355

If provision applies no gain or loss to parent No gain or loss to shareholders

Slide 12-40


Section 355 Requirements

Parent distributes stock representing at least 80% of subsidiary

After transaction, subsidiary engaged in an active business

After transaction, parent engaged in an active business

Slide 12-41


Section 355 Requirements

Both business conducted for five years before transaction

Not carried out as a device to distribute earnings and profits

Slide 12-42


Type D Reorganizations

Process where assets transferred to various old or newly created subsidiaries followed by distribution

Transaction must meet section 355

Slide 12-43

Documents

McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc Principles of Taxation: Advanced Strategies Chapter 12 Corporate Acquisitions, Mergers