1
Chapter 7,
Corporate Acquisitions
and Reorganizations
2
CORP ACQUISITIONS &
REORGANIZATIONS (1 of 2)
?Taxable acquisition transactions
?Taxable vs,tax-free acquisitions
?Tax consequences of reorganizations
?Acquisitive reorganizations
?Devisive reorganizations
3
CORP ACQUISITIONS &
REORGANIZATIONS (2 of 2)
?Other reorganization transactions
?Judicial restrictions on reorganizations
?Tax attributes
?Limitation on use of tax attributes
?Example
4
Taxable Acquisition
Transactions
?Asset acquisitions
?Stock acquisitions w/ no liquidation
?Stock acquisitions w/ liquidation
?Stock acquisitions w/ deemed
liquidation
5
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
6
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
7
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
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
9
Stock Acquisitions with
Deemed Liquidation (1 of 2)
?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
10
Stock Acquisitions with
Deemed Liquidation (2 of 2)
?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)
?Target’s old tax attributes wiped out
–New elections are made
11
Taxable vs,Tax-free
Acquisitions
?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
12
Tax Consequences of
Reorganizations
?Target or transferor corporation
?Acquiring or transferee corporation
?Shareholders & security holders
13
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
14
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
15
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
16
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
17
Acquisitive
Reorganizations
?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
18
Tax Consequences
?Acquiring corporation
–Does not recognize gain/loss when it
receives property as part of a tax-free
exchange
–Acquiried property has a carryover basis
?Shareholders & security holders
–May have gain to extent,nonqualifying”
property received as part of exchange
19
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
20
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
21
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
22
Type D,Asset for Stock
Acquisitive 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
23
Type D,Asset for Stock
Acquisitive 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
24
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
25
Devisive Reorganizations
?Part of corp’s assets transferred to
a second corp which is owned by
either the original corp or its s/hs
?Devisive D reorganizations
–Split-off
–Spin-off
–Split-up
26
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
27
Spin-off
?Corp transfers assets to subsidiary
in exchange for sub’s stock
?Parent distributes sub stock to all
parent sh/s on a pro rata basis
?Parent receives nothing in exchange
for distribution of sub’s stock
28
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
29
Other Reorganization
Transactions (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
30
Other Reorganization
Transactions (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
31
Judicial Restrictions on
Reorganizations
?Continuity of proprietary interest
?Continuity of business enterprise
?Business purpose
?Step transaction doctrine
?Substance over form
32
Tax 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
33
Limitation on Use of Tax
Attributes
?§§ 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
34
Example
(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
35
Example
(2 of 4)
?What is Thomas’ recognized gain or
loss?
?Gain realized,$700K - $475K = $225K
?Boot received,$0
?Recognized Gain,$0
36
Example
(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
37
Example
(4 of 4)
?What if Thomas’ basis had been $750K
?Recognized loss,$ 0
?Basis (carryover),$750K
?Distribution gain or loss,$ 0
38
Comments or questions about PowerPoint Slides?
Email Richard Newmark at Dr.Newmark@PhDuh.com
Chapter 7,
Corporate Acquisitions
and Reorganizations
2
CORP ACQUISITIONS &
REORGANIZATIONS (1 of 2)
?Taxable acquisition transactions
?Taxable vs,tax-free acquisitions
?Tax consequences of reorganizations
?Acquisitive reorganizations
?Devisive reorganizations
3
CORP ACQUISITIONS &
REORGANIZATIONS (2 of 2)
?Other reorganization transactions
?Judicial restrictions on reorganizations
?Tax attributes
?Limitation on use of tax attributes
?Example
4
Taxable Acquisition
Transactions
?Asset acquisitions
?Stock acquisitions w/ no liquidation
?Stock acquisitions w/ liquidation
?Stock acquisitions w/ deemed
liquidation
5
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
6
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
7
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
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
9
Stock Acquisitions with
Deemed Liquidation (1 of 2)
?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
10
Stock Acquisitions with
Deemed Liquidation (2 of 2)
?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)
?Target’s old tax attributes wiped out
–New elections are made
11
Taxable vs,Tax-free
Acquisitions
?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
12
Tax Consequences of
Reorganizations
?Target or transferor corporation
?Acquiring or transferee corporation
?Shareholders & security holders
13
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
14
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
15
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
16
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
17
Acquisitive
Reorganizations
?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
18
Tax Consequences
?Acquiring corporation
–Does not recognize gain/loss when it
receives property as part of a tax-free
exchange
–Acquiried property has a carryover basis
?Shareholders & security holders
–May have gain to extent,nonqualifying”
property received as part of exchange
19
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
20
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
21
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
22
Type D,Asset for Stock
Acquisitive 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
23
Type D,Asset for Stock
Acquisitive 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
24
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
25
Devisive Reorganizations
?Part of corp’s assets transferred to
a second corp which is owned by
either the original corp or its s/hs
?Devisive D reorganizations
–Split-off
–Spin-off
–Split-up
26
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
27
Spin-off
?Corp transfers assets to subsidiary
in exchange for sub’s stock
?Parent distributes sub stock to all
parent sh/s on a pro rata basis
?Parent receives nothing in exchange
for distribution of sub’s stock
28
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
29
Other Reorganization
Transactions (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
30
Other Reorganization
Transactions (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
31
Judicial Restrictions on
Reorganizations
?Continuity of proprietary interest
?Continuity of business enterprise
?Business purpose
?Step transaction doctrine
?Substance over form
32
Tax 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
33
Limitation on Use of Tax
Attributes
?§§ 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
34
Example
(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
35
Example
(2 of 4)
?What is Thomas’ recognized gain or
loss?
?Gain realized,$700K - $475K = $225K
?Boot received,$0
?Recognized Gain,$0
36
Example
(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
37
Example
(4 of 4)
?What if Thomas’ basis had been $750K
?Recognized loss,$ 0
?Basis (carryover),$750K
?Distribution gain or loss,$ 0
38
Comments or questions about PowerPoint Slides?
Email Richard Newmark at Dr.Newmark@PhDuh.com
