For example, lets say that a corporation has assets valued at $15 Million and liabilities of $5 Million. One would expect that the stock would sell for $10 Million, which is the net asset value. Thats all we are doing with the ADSP. The only trick is that there is one liability that is missing the tax liability that would arise if the assets were sold for their FMV. So lets say that the assets above have a tax basis of $8 Million. A sale of the assets for $15 Million would create a corporate gain of $7 Million and a corporate tax of $1,470,000 at a 21% tax rate. The buyer of the stock is succeeding to this corporate-level tax liability. This means that the liabilities on the balance sheet, $5 Million, need to be increased by the tax liability of $1,470,000. They are now $6,470,000. So if the stock sold for $10 Million the assets must be worth $16,470,000. But if they are worth $16,470,000 the gain from a deemed asset sale is now $8,470,000 and the tax due is $1,778,700 instead of $1,470,000. The assets must be worth $17,778,700. But this changes the tax liability again.

So we have a simultaneous equation with one unknown (ADSP).

The ADSP = Stock Purchase Cost + Target Liabilities

Target Liabilities = Non-tax Liabilities + Tax Liability

Tax Liability = .21 (ADSP Tax Basis of Assets)

So you solve for ADSP by taking the stock purchase price + known liabilities + the tax liability that would occur from a sale at the ADSP. Solve for ADSP by plugging in the above variables. Check your answer by asking yourself does the stock purchase price make sense based on what I determined the deemed sale price of the assets to be and the liabilities, including the deemed tax liability. That is, Stock Price = Deemed Asset Price Target Liabilities.

YOUR ASSIGNMENT

Prepare a memo for the file showing the ADSP in a 2018 sale and comparing it to the ADSP from a 2017 sale.

Acquiring Corporation pays $22,000,000 for 100% of Target stock in a single transaction.

Target assets have a tax basis of $12,000,000.

Target liabilities are on the balance sheet at $4,000,000, and this is a good number.

For example, lets say that a corporation has assets valued at $15 Million and liabilities of $5 Million. One would expect that the stock would sell for $10 Million, which is the net asset value. Thats all we are doing with the ADSP. The only trick is that there is one liability that is missing the tax liability that would arise if the assets were sold for their FMV. So lets say that the assets above have a tax basis of $8 Million. A sale of the assets for $15 Million would create a corporate gain of $7 Million and a corporate tax of $1,470,000 at a 21% tax rate. The buyer of the stock is succeeding to this corporate-level tax liability. This means that the liabilities on the balance sheet, $5 Million, need to be increased by the tax liability of $1,470,000. They are now $6,470,000. So if the stock sold for $10 Million the assets must be worth $16,470,000. But if they are worth $16,470,000 the gain from a deemed asset sale is now $8,470,000 and the tax due is $1,778,700 instead of $1,470,000. The assets must be worth $17,778,700. But this changes the tax liability again.

So we have a simultaneous equation with one unknown (ADSP).

The ADSP = Stock Purchase Cost + Target Liabilities

Target Liabilities = Non-tax Liabilities + Tax Liability

Tax Liability = .21 (ADSP Tax Basis of Assets)

So you solve for ADSP by taking the stock purchase price + known liabilities + the tax liability that would occur from a sale at the ADSP. Solve for ADSP by plugging in the above variables. Check your answer by asking yourself does the stock purchase price make sense based on what I determined the deemed sale price of the assets to be and the liabilities, including the deemed tax liability. That is, Stock Price = Deemed Asset Price Target Liabilities.

YOUR ASSIGNMENT

Prepare a memo for the file showing the ADSP in a 2018 sale and comparing it to the ADSP from a 2017 sale.

Acquiring Corporation pays $22,000,000 for 100% of Target stock in a single transaction.

Target assets have a tax basis of $12,000,000.

Target liabilities are on the balance sheet at $4,000,000, and this is a good number.