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Basic types: IRC 368(a)(1)(A)Statutory merger IRC 368(a)(1)(B)Stock-for-stock acquisition IRC 368(a)(1)(C)Stock-for-asset acquisition Other: Forward and reverse triangular mergers
* These transactions are not actually tax-freethey only provide target shareholders with tax-deferral of the gain on the acquisition. Also, each of these tax-free reorganization structures requires shareholders to recognize a taxable gain to the extent they receive cash or other forms of boot.
A reorganizations usually require that at least 50%* of the total consideration received by target shareholders in the acquisition is acquirer stock
acquirers can use either voting or non-voting stock and either common or preferred stock.
* 40% acquirer stock is sufficient in some transactions.
The acquirer takes a carryover basis in the assets of the target. The tax attributes of the target will carry over to the acquirer, but they will be limited by IRC 382.
Assume that any acquirer stock received by T's shareholders in the transaction is held until death and that all shareholders receive an equal portion of stock and boot. *Historical cost equals $200, and there is no accumulated depreciation. *T's shareholders have held the stock of T for more than 12 months.
Purchase Price: Cash Stock Target Corporation Tax Liability Target Shareholder Gain Recognized Target Shareholder Tax Liability Target Shareholder After-tax Wealth: Cash Stock Total Acquirer Net After-tax Cost: Pre-tax Cost Less: Incremental Tax Savings Net After-tax Cost
Tax-free Acquisitions Taxable Acquisitions Stock Sale w/o a 338 Election 368 "A"* $1,370.00 $1,370.00 548.00 1,370.00 822.00 0.00 0.00 548.00 109.60 0.00 1,370.00 234.00
*Assumes that the mix of consideration is 60% stock and 40% cash.
Target Shareholders: Basis in target stock = $200. Gain realized is $1,170 ($1,370 received - $200 stock basis). Gain recognized is $548 (lesser of gain realized or boot received).
Target Shareholders: Now own acquirer stock and have some boot.
100% of subsidiarys stock Acquirer Subsidiary: Transfers $1,370 (cash and acquirer stock) for all of the assets and liabilities of the target.
Target Shareholders: Basis in target stock = $200. Gain realized is $1,170 ($1,370 - $200). Gain recognized is $548 (lesser of gain realized or boot received).
The acquirer takes a carryover basis in the assets of the target and in the stock of the target equal to the target shareholders basis in the targets stock pre-acquisition. The tax attributes of the target will carry over to the acquirer, but they will be limited by IRC 382.
Gain realized by Ts shareholders = value of the consideration received - target shareholders basis in the target stock. Gain recognized by Ts shareholders = lesser of gain realized or boot received.
Purchase Price: Cash Stock Target Corporation Tax Liability Target Shareholder Gain Recognized Target Shareholder Tax Liability
Tax-free Acquisitions Taxable Acquisitions Stock Sale w/o 368 "A" 368 "B" * a 338 Election $1,370.00 $1,370.00 $1,370.00 548.00 0.00 1,370.00 822.00 1,370.00 0.00 0.00 548.00 109.60 0.00 0.00 0.00 0.00 1,370.00 234.00
Target Shareholder After-tax Wealth: Cash $438.40 $0.00 Stock 822.00 1,370.00 Total $1,260.40 $1,370.00
Acquirer Net After-tax Cost: Pre-tax Cost Less: Incremental Tax Savings Net After-tax Cost
Target (now a subsidiary of the acquirer): Asset basis carries over ($200).
A
A Voting Stock A Voting Stock
T S/Hs
A Voting Stock
Acq. Sub.
Merged
T S/Hs Transfer Control (80%) for A Voting Stock. T must hold Sub-all of Acquisition Sub and Ts Assets.
Former T S/Hs
The acquirer takes a carryover basis in the assets of the target. The tax attributes of the target will carry over to the acquirer, but they will be limited by IRC 382.
Gain realized by Ts shareholders = value of the consideration received - target shareholders basis in the target stock. Gain recognized by Ts shareholders = lesser of gain realized or boot received.
Purchase Price: Cash Stock Target Corporation Tax Liability Target Shareholder Gain Recognized Target Shareholder Tax Liability Target Shareholder After-tax Wealth: Cash Stock Total Acquirer Net After-tax Cost: Pre-tax Cost Less: Incremental Tax Savings Net After-tax Cost
368 "A" 368 "B" 368 "C" * $1,370.00 $1,370.00 $1,370.00 548.00 0.00 274.00 822.00 1,370.00 1,096.00
0.00 548.00 109.60 0.00 0.00 0.00 0.00 274.00 54.80
*Assumes that the mix of consideration is 20% cash and 80% acquiring firm voting stock.
Target Shareholders: Basis in target stock = $200. Gain realized is $1,170 ($1,370 received - $200 stock basis). Gain recognized is $274 (lesser of gain realized or boot received).
Target Shareholders: Now own acquirer stock and have some boot.
The target corporation and the acquiring firm are C corporations. The target is owned by individual investors and has no liabilities. The acquirer's stock does not pay dividends, and the acquirer does not intend to pay dividends anytime in the future.
548.00 109.60
0.00 0.00
274.00 54.80
822.00 164.40
1,370.00 270.00
$438.40 $0.00 $219.20 $657.60 822.00 1,370.00 1,096.00 548.00 $1,260.40 $1,370.00 $1,315.20 $1,205.60
$1,370.00 $1,370.00 $1,370.00 $1,370.00 0.00 0.00 0.00 0.00 $1,370.00 $1,370.00 $1,370.00 $1,370.00
$1,370.00
100% stock