Target's shareholder group has 2 shareholders, S1 and S2 (both are individuals). After owning their stock for > 5 years, the shareholders decide as a group that the best thing to do is sell the company.  The parties are considering three potential transactions:  1.) a stock sale to Buyer; 2.) an asset sale to Buyer; and 3.) a statutory merger of Target into Buyer qualifying as a tax-free reorganization. Asset Deal:  Buyer gives $100 million to Target in exchange for all of Target's assets. Target pays off all liabilities before entering the transaction.

Stock Deal:  Buyer gives $50 million of cash to S1 and $50 million of cash to S2 in exchange for all the stock held by S1 and S2.

$80,000,000 of Acquiring Stock

 

Merger: Buyer gives $90 million of its own stock and $10 million of cash to Target followed by Target's merging into Buyer and Target's liquidation (with distribution of the cash evenly to S1 and S2). Buyer will continue a historic and significant business of Target.Inside and Outside Basis for All 3 Scenarios Below

Target's Inside Basis:  Target has a total basis of $9,000,000 in its assets.

S1's and S2's Outside Basis:  S1 and S2 each own 50% of Target's stock and each have an outside basis in their stock of $1,000,000

1. Asset Deal (please respond to 1a, 1b, and 1c using the facts above for an asset deal)
   1. Target's Gain or loss: What is Target's gain or loss on this transaction and what section of the Internal Revenue Code did you rely on for your answer?
   2. Asset Basis:  What is Buyer's basis in the assets acquired in the transaction and what section of the Internal Revenue Code did you rely on for your answer?
   3. S1's and S2's Gain or Loss on Liquidation of Target:  S1 and S2 liquidate target to get access to the proceeds of the asset sale (50 million of cash to each).  Compute the gain or loss of S1 and S2 upon the liquidation and state what section(s) of the Internal Revenue Code you relied on for your answer.
   4. Stock Deal (please respond to 2a, 2b, 2c, and 2d using the facts above for a stock deal)
      1. S1's and S2's Gain or Loss on Stock Sale:  What gain or loss must S1 and S2 recognize on this transaction and what section of the Internal Revenue Code did you rely on for your answer?
      2. Tax on S1's and S2's Gain or Loss on Stock Sale:  Compute the tax liability on S1's and S'2 gain on the stock sale and identify the section of the Internal Revenue Code that set the tax rate for the gain.Stock Basis:  What is Buyer's basis in the stock acquired in the transaction and what section of the Internal Revenue Code did you rely on for your answer?
      3. Asset Basis:  What is Buyer's basis in the assets acquired in the transaction and what section of the Internal Revenue Code did you rely on for your answer?  In other words, now that Buyer owns Target stock, has there been any change to the basis of the assets in the acquired corporation (Target).
      4. Statutory Merger (please respond to 3a, 3b, 3c, 3d, and 3e using the facts above for a merger)
         1. Qualification as "A" Reorganization:  Does this transaction qualify as an "A" reorganization?  In other words, does it meet the 3 judicial doctrines and constitute a merger within the meaning of the regulations (remember that not every state law merger constitutes a merger for tax purposes)? Please address each.  (You may assume that the business purpose test is met).

 

 

1. Target's Gain or loss: What is Target's gain or loss on this transaction and what section of the Internal Revenue Code did you rely on for your answer?
2. S1's and S2's Gain or Loss on Merger:  What is the gain or loss recognized by S1 and S2 resulting from the merger and what section of the Internal Revenue Code did you rely on for your answer?
3. Asset Basis:  What is Buyer's basis in the assets acquired in the transaction and what section of the Internal Revenue Code did you rely on for your answer?
4. Stock Basis:  What is the stock basis of S1 and S2 in Buyer and what section of the Internal Revenue Code did you rely on for your answer?
5. Comparison:  Compare the three options presented and describe which option provides the greatest benefit to Buyer and which option provides the greatest benefit to S1 and S2.  Explain why you reached these conclusions.

 

1. Other Things to Consider:  Name and explain two concerns (other than tax issues - business or legal) that may determine the terms of the deal and the option chosen.