Tax Case 4

Goodwill Acquired in an Acquisition Is it Deductible?

As the CFO of General Dynamo, you are very excited as you have just completed the negotiations related to the purchase of Apex Systems, a complimentary business to General Dynamo. The sole shareholder of Apex has agreed to either of the following purchase offers:

A: General Dynamo will pay $10,000,000 for 100% of the outstanding stock of Apex

OR

B: General Dynamo will pay $11,000,000 for 100% of the net assets of Apex, which includes all tangible and intangible assets as well as all recorded liabilities.

The fair value of the acquired assets and liabilities is as follows:

Current Assets (Tangible) $2,500,000

Long Term Assets (Tangible) $4,000,000

Liabilities $3,500,000

Net Tangible Assets Acquired $3,000,000

Based solely on the net after-tax cost of the acquisition, which purchase offer should you choose: A or B? Why?

Why does the seller require a higher price to be paid for acquiring net assets versus stock? What internal revenue service code section addresses how sales of assets versus sales of stock are taxed? What are the significant differences? What period may the goodwill be deducted for tax purposes? Why do you think the Internal Revenue Service treats these two purchase offers differently?