LO.2, 3, 4, 5, 6 Float Corporation is in the luxury yacht business and has been hit hard by the downturn in the economy. It has been barely breaking even, and its investments of its previous profits have substantial built-in capital losses. It has not sold these investment assets because it cannot utilize the resulting tax losses. Float’s attorney suggests that it try to merge with a profitable company, specifically one with built-in capital gains. A profitable company would be willing to acquire Float just for its built-in capital losses.

Float advertises for a merger partner, and Fierce, Inc., contacts Float. Fierce manufactures and installs home security systems. In the discussion, Float determines that Fierce could use a small fraction of Float’s business assets and might consider developing security systems for yachts, but is not at all interested in manufacturing yachts. Most important, Fierce is very interested in acquiring Float’s built-in capital losses.

Fierce offers 10% of its stock and $500,000 in exchange for all of Float’s assets. Float can use the cash to buy the stock of the shareholders who oppose the merger. What tax issues should Fierce and Float consider before agreeing to this merger as structured?