Chapter 4 – Tax Planning Options



Mergers and Acquisitions

Chapter 4 – Tax Planning Options

Taxable vs. Non-Taxable Acquisitions:

Stock-for-stock is tax deferred

Stock for Cash or Stock for Debt is taxable.

Non-taxable reorganizations:

Type A – merger or consolidation - target firm shareholders exchange their stock for that of the acquiring firm.

Type B – stock-for-stock exchanges where target may be liquidated or operated as a subsidiary.

Type C – stock-for-asset transactions where at least 80% of the target assets are acquired.

Summary: Table 4.1 Acquiring Firm Target Firm

A. Nontaxable NOL carryover Deferred gains for

Tax credit carryover shareholders

Carryover Asset basis

B. Taxable Stepped up asset basis Immediate gain

Loss of NOL depreciation recapture

Loss of tax credits

Other developments:

Tax Reform Act of 1986:

1. Restricted NOL carryovers – limited to (LT bond rate * value) per year

2. Repealed capital gain preferential rate

3. Minimum tax on profits

4. General Utilities doctrine repealed (voluntary liquidations)

5. No deduction for greenmail

Stock Purchase vs. Asset Acquisition:

Legal difference is exposure to liabilities – with stock you buy the company and with assets you have no exposure to lawsuits or debts.

Tax difference depends on gain in assets, which depends on when the assets were acquired and when the stock was acquired.

Example:

Q 4.4 p. 104

Overall tax consequences of LBO’s

1. capital gain tax on shareholder gains

2. capital gains on asset sell-offs by LBO company

3. interest income from LBO payments is subject to tax

4. LBO might increase operating income and tax on that income

5. increased revenue subject to tax

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