Question
Sec. 338 Election. Gator Corporation is considering the acquisition of Bulldog Corporations stock in exchange for cash. Two options are under review: (1) Gator purchases
Sec. 338 Election.
Gator Corporation is considering the acquisition of Bulldog Corporations stock in exchange for cash. Two options are under review: (1) Gator purchases the assets from Bulldog for $1.4 million or (2) Gator purchases the Bulldog stock for $1 million and makes a Sec. 338 election shortly after the stock purchase. Bulldog has no NOL or capital loss carryovers. Bulldogs balance sheet is presented below.
Assets | Adjusted Basis | FMV | L & E | Amount |
Cash | 100,000 | 100,000 | Short-term debt | 200,000 |
Marketable securities | 140,000 | 200,000 | Long-term debt | 200,000 |
AR | 100,000 | 100,000 | Paid-in-capital | 300,000 |
Inventory (FIFO) | 100,000 | 150,000 | Retained earnings | 700,000 |
Plant and Equipment | 200,000 | 500,000 | ||
Intangibles | 0 | 350,000 | ||
Total | 640,000 | 1,400,000 | 1,400,000 |
Please make sure to provide detail works for credit with exact math solution for each section.
1-What advantages would accrue to Gator if it purchases the assets directly? What disadvantages would accrue to Bulldog if it sells the assets and then liquidates?
2-What advantages would accrue to Gator if it purchases the Bulldog stock for cash and subsequently makes a Sec. 338 election? What advantage would accrue to Bulldog if its shareholders sell the Bulldog stock?
3-How would your answers change if Bulldog had incurred $250,000 of NOLs in the current year that it cannot carry back in full due to insufficient taxable income in the preceding two years?
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