Suppose that Delta Airlines decides to acquire Jet Blue, whereby Delta acquires all of the outstanding stock of Jet Blue for $3 billion in cash. The question then is whether Delta should make a Section 338(g) election. Assume that the tax basis of Jet Blues assets immediately prior to the acquisition is $2 billion and its liabilities are $500 million. For simplicity, assume any step-up in tax basis is allocated to assets that depreciate for tax purposes over a period of 10 years using straight line, and that Delta faces a 21% tax rate and a 10% discount rate. Assume that Jet Blue has $800 million of net operating loss carryovers, and that because of Section 382 limitations, any acquired NOLs would have only a small value to Jet Blue in subsequent years (for the purposes of the questions below you can assume the NOLs have no value to Jet Blue other than reducing the tax cost of a 338 election).

a. What would be the tax cost of the 338 election? b. What would be the present value of the tax benefit of such an election? Note the present value of a $1 annuity for 10 years at a 10% discount rate is $6.145. c. Should Delta make the 338(g) election? Explain your recommendation.