Chapter 7: Corporate Acquisitions and Reorganizations

Report
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CORP ACQUISITIONS &
REORGANIZATIONS (1 of 2)
 Taxable
acquisition transactions
 Taxable vs. nontaxable acquisitions
 Tax consequences of reorganizations
 Acquisitive reorganizations
 Divisive reorganizations
 Other reorganization transactions
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CORP ACQUISITIONS &
REORGANIZATIONS (2 of 2)
 Judicial
restrictions on reorganizations
 Tax attributes
 Limitation on use of tax attributes
 Example
 Tax planning considerations
 Compliance & procedural considerations
 Financial statement implications
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Taxable Acquisition
Transactions
 Asset
acquisitions
 Stock acquisitions w/ no liquidation
 Stock acquisitions w/ liquidation
 Stock acquisitions w/ §338 deemed
sale election
 See Table 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 (target)
corporation on each asset
 Acquiring
Basis
corporation
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 §338
Deemed Sale Election (1 of 5)
 How
acquisition is accomplished
Shareholders
of target corp sell their
shares directly to purchaser corp
Within
a 12-month period
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 §338
Deemed Sale Election (2 of 5)
 Target
corp recognizes gains & 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 slide 12
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Stock Acquisitions with §338
Deemed Sale Election (3 of 5)
 Target’s
New
 See
old tax attributes wiped out
elections are made
Topic Review 1 for summary
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Stock Acquisitions with §338
Deemed Sale Election (4 of 5)
ADSP = G + L - (TR x B)
(1 – TR)
ADSP: Adjusted deemed sale price
G: Acquiring’s grossed-up basis in the target
corporation’s recently purchased stock
L: Target’s liabilities other than tax liab for sale
TR: Applicable federal income tax rate
B: Adjusted basis of asset(s) deemed sold
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Stock Acquisitions with §338
Deemed Sale Election (5 of 5)
 Tax
basis in assets after deemed sale
Adjusted

grossed-up basis
Sum of
 Recently
purchased stock
 Target corp’s nontax liabilities
 Target corp’s tax liability
Allocate
to 7 classes using residual method
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Taxable vs. Nontaxable
Acquisitions (1 of 2)
 Use
of cash and debt for acquisition
produce taxable acquisition
 Use of stock and limited cash or debt
likely produce nontaxable acquisition
 Primary tax impact is on the target
(corporation being acquired)
 See Topic Reviews 2 & 3
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Taxable vs. Nontaxable
Acquisitions (2 of 2)
 Only
purchase method allowed for
GAAP for business combinations
ASC
805 (FAS No. 141)
 Goodwill not amortized
Assets recorded at FMV
Tested for impairment
ASC 350 (FAS No. 142)
for GAAP
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Tax Consequences of
Reorganizations
 Target
Also
corporation
referred to as “transferor” corp
 Acquiring
Also
corporation
referred to as “transferee” corp
 Shareholders
& security holders
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Target (Transferor)
Corporation
 No
gain/loss on asset transfer
 Assets retain depr recap potential
 Assumption of liabilities generally
does not trigger gain recognition
Possible
exception for divisive Type D
 No
gain/loss on distribution of stock
and securities as part of reorg plan
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Acquiring (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
Does
holding period
not include boot
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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
Dividend
test
or capital gain depending on §302
 Dividend
vs. redemption
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Shareholders & Security Holders
(2 of 2)
 Basis
of stocks & securities received
Adjusted basis in stocks & securities given up
+ Gain recognized on the exchange
- Money & FMV of other property received
= Basis of nonrecognition property received
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Acquisitive Reorganizations
 Acquiring
corp obtains part or all of
assets or stock of a target corp
 Tax
 See
topic Review C7-5
consequences
 Type A: Merger or consolidation
 Type C: Assets for stock
 Type B: Stock for stock exchange
 Type D: Asset for stock
 Type G: Bankruptcy
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Tax Consequences
 Acquiring
Does
corporation
not recognize gain/loss when it
receives property as part of a tax-free
exchange
Acquired property has a carryover basis
 Shareholders
May
& security holders
have gain to extent
“nonqualifying” property received as
part of exchange
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Type A: Merger or Consolidation
(1 of 2)
 Merger
One
company liquidates
 Consolidation
Both
companies liquidate and a new
third company emerges
 Triangular
merger
Acquiring
corp uses a controlled
subsidiary to acquire target
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Type A: Merger or Consolidation
(2 of 2)
 Reverse
triangular merger
Acquiring
corp uses a controlled
subsidiary to acquire target
Controlled subsidiary merged into the
target corporation
Target corporation becomes a
subsidiary of the parent corporation
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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 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
New Reg. allows acquiring corp to use
as much as 60% other consideration
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Type D: Asset for Stock
Acquisitive D (2 of 2)
 Target
or target s/hs must control
acquiring corp immediately after
asset transfer
defined as either  50% of
voting power of voting stock or  50%
of total value of all stock
Control
 Target
liquidates itself
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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 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 courtapproved plan
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Divisive 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
 Divisive
G reorganization
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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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Divisive G Reorganization
 Existing
corp transfers part of assets to
a second corporation according to a
court-approved plan
 Transferor distributes all stock and
securities to second corp to s/hs,
security holders, and creditors
 Transferor corp may continue
business or be liquidated by the court
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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
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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
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Judicial Restrictions on
Reorganizations (1 of 2)
 If
judicial restrictions are not met,
reorganization loses its tax-free status
Continuity
of proprietary interest
Old
owners must continue ownership
New Reg now accepts 40% as the
continuity of interest threshold
Continuity
Old
of business enterprise
assets must be used in new business
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Judicial Restrictions on
Reorganizations (2 of 2)
Business
Valid
Step
purpose
business purpose for transaction
transaction doctrine
IRS
may collapse series of independent
transactions if all part of a plan
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Tax Attributes
 Tax
attributes follow assets
NOLs,
capital losses, E&P, gen. bus.
credit, inventory methods
 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
Attributes (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
Attributes (2 of 2)
 §383
restricts tax credit and capital
loss carryovers if §382 applies
Restrictions
similar to NOLs
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).
 §384
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Example
(1 of 4)
 Thomas
Corp transfers all assets and
part of its liabilities to Andrews
Corp. for $600K of Andrews
Common stock. Following the
merger, Thomas is liquidated
Thomas’
basis in assets
Liabilities transferred
$475K
$100K
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Example
(2 of 4)
 What
loss?
is Thomas’ recognized gain or
Gain
realized: $700K* - $475K = $225K
Boot received: $0
Recognized Gain: $0
* $700K = $600K stock + $100K relief of
liabilities
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Example
(3 of 4)
 What
is Andrews’ basis in 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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Example
(4 of 4)
 What
if Thomas’ basis had been
$750K?
Recognized
loss:
Basis (carryover):
Distribution gain or loss:
$ 0
$750K
$ 0
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Tax Planning Considerations
 Why
use a reorganization instead of a
taxable transaction?
Target
corp s/h defer gain recognition
Target corp exchanges assets w/out gain
recognition or depreciation recapture
 Avoiding
reorganization provisions
Allows
acquiring corp to make §338
election
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Compliance and Procedural
Considerations
 §338
election
Acquiring
 Plan
corp files Form 8023
of reorganization
Written
 Ruling
plan not required, but prudent
requests
May
request advanced ruling from IRS
on tax consequences of reorganization
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Financial Statement Implications
(1 of 2)

ASC 805 (SAFS No. 141)
Acquiring
corp may only use purchase
method for financial statement purposes
Deferred tax accounts and treatment of
goodwill depend on whether acquisition
was taxable or nontaxable
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Financial Statement Implications
(2 of 2)
 Taxable
asset acquisition
 Nontaxable asset acquisition
 Stock acquisition
 Pricing the acquisition
 Net operating losses
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Taxable Asset Acquisition
 Tax
basis likely same as book basis
No
deferred tax liabilities or assets
If tax and book goodwill are equal,
§197
amortization of goodwill creates
temporary difference
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Nontaxable Asset Acquisition
 Book
bases differ from carryover tax
bases of acquired assets
ASC
850 (SFAS 109) prescribes that
acquiring corp recognize deferred tax
liability/asset for book/tax differences in
bases of transferred assets and liabilities
 Goodwill
No
not amortizable for tax
temporary difference
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Stock Acquisition
 Target
corp remains intact as a
subsidiary of acquiring corp
 Adjustments under ASC 850 & 740
(SFAS 141 & 109) occur when
preparing consolidated financial
statements
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Comments or questions about PowerPoint Slides?
Contact Dr. Richard Newmark at
University of Northern Colorado’s
Kenneth W. Monfort College of Business
[email protected]
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