I need help creating a template on how to calculate tax implications of GTE's offer with MCI in 1997. Question #4

Cases in T ax Strategy 43 GTE 's Oer: 1. What were the terms of GTE's offer for MCI? 2. What would the tax implications of this acquisition be for MCI's shareholders? 3. What type (tax type) of merger is this, based on your best guess (see merger documents that are attached)? 4. What were the tax implications of this merger structure for GTE? 0 What gross tax basis in MCI's assets (in dollars) would GTE take (approximately)? Assume that all of MCI's deferred taxes relate to timing differences between book and tax depreciation (use the deferred tax data from the balance sheet, not the footnotes). Compute the basis as of June 30, 1997. (Use MCI's June 30, 1997 balance sheet and MCI's 12/31/97 income statement and footnotes as the basis for your computations.) 0 What net tax basis in MCI's assets would GTE take? 0 What tax basis in MCI stock (in dollars) would GTE take (approximately)? WorldCom's Offer (attached are excerpts from WorldCom's nancial statements and press releases which detail what you need to answer this portion of the case): 1. What were the terms of WorldCom's offer for MCI? 2. What would the tax implications of this acquisition be for MCI's shareholders? 3. What type (tax type) of merger is this, based on your best guess (see merger documents that are attached)? 4. What were the tax implications of this merger structure for WorldCom? 0 What gross tax basis in MCI's assets (in dollars) would WorldCom take (approximately)? Assume that all of MCI's deferred taxes relate to timing differences between book and tax depreciation (use the deferred tax data from the balance sheet, not the footnotes). Compute the basis as of June 30, 1997. (Use MCI's June 30, 1997 balance sheet and MCI's 12/31/97 income statement and footnotes as the basis for your computations.) I What net tax basis in MCI's assets would WorldCom take? 0 What tax basis in MO] stock (in dollars) would WorldCom take (approximately)? 2009 Merle Erickson 50 Cases in Tax Strategy MCI Financial Statement Data MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES* BALANCE SHEETS June 30 , 1997\\ December 31 , 1996 ASSETS ( In millions ) CURRENT ASSETS Cash and cash equivalents* $ 187 Marketable securities 55 95 161 Receivables , net of allowance for uncollectibles of $306 and $273 million 3, 670 3, 480 Other assets 845 888 TOTAL CURRENT ASSETS 4, 665 PROPERTY AND EQUIPMENT , net 4 , 716 13, 286 12 , 174 OTHER ASSETS Noncurrent marketable Iketable securities 33 884 58 Other assets and deferred charges , net 678 Investment in affiliates* 662 690 Investment in News Corp. 1 . 350 1. 350 Investment in DBS 980 893 Goodwill , net\\ 2. 391 TOTAL OTHER ASSETS 2,419 6. 300 6. 088 TOTAL ASSETS $24, 251\\ $:22, 978 LIABILITIES AND STOCKHOLDERS EQUITY* "CURRENT LIABILITIES Accounts payable 975 992 Accrued telecommunications expense 2, 134 2. 045 Other accrued liabilities 1 , 807 1. 806 Long-term debt due within one year 1, 930 203 TOTAL CURRENT LIABILITIES 6, 846 5 , 046 VONCURRENT LIABILITIES Long-term debt* 3 , 259 4. 798 Deferred taxes and other 2. 046 1. 723 TOTAL NONCURRENT LIABILITIES 5 , 305 Trust PREFERRED SECURITIES 6 , 321 750 750 STOCKHOLDERS' EQUITY* Class A common stock , 14 14 Common stock 593 million shares OU 60 Additional paid in capital 6, 373 6, 410 Retained earnings 5. 789 Treasury stock , TOTAL STOCKHOLDERS" EQUITY ( 8 86 ) 1. 054 ) 1 1. 350 10. 601 TOTAL LIABILITIES* AND STOCKHOLDERS' EQUITY* $: 24, 251\\ $ 22, 978 @ 2009 Merle Erickson*- ases in Tax Strategy 51 897 349 548 147 1 , 118 19 95 1 , 828 4 , 426 7 , 893 14 , 147 $15 , 265 (5 ) 34 ( 196 ) 35 (156 ) 753 1996 1 , 990 2 , 313 9 , 489 5 , 028 1 . 664 16 , 181 $18 , 494 $ 1 , 202 ( 15 ) 299 675 90 18 ( 235 ) 60 ( 14 4 ) 19 97 5 , 940 2 , 082 10 . 956 18 , 978 $19 , 653 For the fiscal year ended December 31 , 1997 MCI COMMUNICATIONS CORPORATION FORM 10 - K @ ( losses ) of affiliated companies Distributions on subsidiary Trust preferred securities _ _ ^ ^ MCI Communications Corporation and Subsidiaries Depreciation including asset write - downs ( In millions , except per share amounts ) Sales , operations and general* CONSOLIDATED INCOME STATEMENTS INCOME BEFORE INCOME TAXES TOTAL OPERATING EXPENSES Year ended December 31 . INCOME FROM OPERATIONS Income tax provision* Cost OF services OPERATING EXPENSES Other expense , net Equity in income* Interest expense Interest Income NET INCOME REVENUE ( 149 )| ( 187 )| ( 32 )| 2 2009 Merle Erickson52 Cases in Tax Strategy = = = = = = = =] 35% m N 5 ( 1 ) ( 1 ) 39 % - - - - 15 23 605 12.9 14 4 $182 - - - - : 1995 $349 19 95 35% 38 8 - - - - - - - - - - 455 68 22 276 298 - - - - - - - 19 96 $387 1996 $753 $60 company 's ' million of the company had $179 $159 m - - - - - - - 1997 35% - - - - ( 8 ) 38 8\\ ( 7 ) 12 57 10 21 69 $ 90 1997\\ `expiring through 2004 and $53 million* $ 21 . to additional paid- in capital For tax * = = = = = = = = = = = = = = = Income tax rate to the control ,* the company had available $576 million OF U. S . _expiring through 2012 , S121 million which were purposes ,\\ ownership* Income tax`` Federal* deductions related to common stock transactions with it's employee benefit plans . All 1 1 ion OF Alternative Minimum Tax ( AMT) credit carry Forward's available that had In 1997 , 19 96 , and 1995 , the company recorded a tax benefit OF $4 4 million , OF U. K . net operating loss carryforwards which had an indefinite life .` respectively ,* due to change in* statutory\\ For Federal The components of the total income tax provision are :` - - - - - of the = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =^ Canadian net operating loss carry Forwards { - - - - - - - - 0 - - - - 0 0 0 0 0 0- -- - and $25 million ,* limitation @ 31 , 1997 ,\\ State and local income taxes , net Statutory federal income tax rate net operating loss carry Forwards\\ no expiration date . In addition ,* OF Federal income tax effect* effective income tax rate is :` Deferred income tax provision current Income tax provision = = = = = = = = = = = = = = = = = = = = = = = = = = = = = Total income tax provision* Nondeductible amortization Effective income tax rate - - - - - - - - - - - - - - - - - - Year ended December 31 , Year ended December 31 . NOTE 12 . INCOME TAXES Nontaxable dividends* to reconciliation State and local State and local RED tax credits ( In millions ) At December* million , $ Deferred Federal* Current subject\\ Federal Other* = = = = = 2) 2009 Merle EricksonCases in Tax Strategy 53 = = = = = = = = = = = = = 61 56 38 ( 87 ) 33 332 104 = = = = = 1995 ( 1 , 627 ) $ ( 1 , 040 ) $ ( 1 , 040 ) $ ( 1 , 57 1 ) 587 = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = == = = = = = = = = = = = S = = = = = = = = = = = = = = = = = = = = = = = = ) 96 34 62 (77 ) 1 14 335 \\= = = =EZ= =EE= = = = are $ ( 1 , 321 )| ( 1 , 871 ) 1996 $ ( 1 , 321 ) $ ( 1 , 885) has been over the \\valuation realize the The company I based upon I income tax 550 These amounts* allowance } or other* = = = = = = = = = = = = = = = = = = = = = = = =\\ e subsidiaries* s net deferred i ( 6 ) 37 ( 2.2 ) 64 41 228 296 321 19 97 $ ( 1 , 414 )| ( 2 , 343 ) $ ( 1 , 414 ) S ( 2 , 373 ) \\= = = = = = = = =) I goodwill balance ." = = = = = = = = = = = = : realizability of goodwill ! acquired . " 929 no valuation* operating income* S 1997 .` . the company 's ` amortization associated with goodwi ] ] at December 31 , 1997 and 1996 that it is more likely than not that it will* respectively . excess of the cost to acquire* amortized using the straight- Line method over lives ranging From 10 to 40 years . . accordingly ,* Flows and { believes that no impairment of goodwill existed at December 31 , 1997 . and 1995 ,\\ Y evaluates the* market value of the net assets a 1996 ,\\ techniques For each subsidiary having a material Reorganization and realignment expenses the* recorded in the three years ended December 31 , income tax asset and , a Net operating Loss carryforward Liability was comprised of the Following :` Alternative minimum and general undiscounted - . cash\\ = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =\\ Domestic equity investments* Capital losses carry Forward Allowance for uncollectibles Deferred Income tax Liability was $3 21 million and $247 million , I The components of these amounts are? business tax credits I believes Net deferred income tax liability* Net deferred income tax liability\\ Communications system represents Customer discounts\\ fair ! The company periodically* Deferred Income tax asset At December 31 , 1997 ,\\ Other , net ( IIL mi 1 1 1 ons ) Accumulated The company projected estimated Goodwill* deferred Goodwi ] ] 2) 2009 Merle Erickson