Stock Acquisitions with No Liquidation (1 of 2) How acquisition is accomplished Shareholders of target corp sell their shares directly to purchaser corp arget 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 6
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
Stock Acquisitions with No Liquidation (2 of 2) Purchaser corp consequences Purchaser has a new subsidiary Basis in target stock is acquisition cost >Purchasers basis in targets stock (outside basis) may be >targets basis in its assets No adjustment to basis of targets assets Tax attributes of target transfer to purchaser
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
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 8
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
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 8 338 election pretending that target has been liquidated and a new subsidiary created in its place 9
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
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 Targets old tax attributes wiped out New elections are made 10
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