Question

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?

Answer 1

sol:

Based entirely on the “net after-tax” price of the acquisition, that purchase supply must you choose: A or B? Why?

Ans: With reference to the tax consequences, we must always perceive the sort of corporation, we have a tendency to area unit getting and consequently the tax implication keeps ever-changing. however with a generic read, we have a tendency to could say that, the tax consequences towards the acquisition value of associate degree plus group action is quite that of a stock transactions. therefore we have a tendency to could select the “option – A” for this method.

Why will the vendor need a better value to be got getting “net assets” versus “stock”?

Ans: the vendor needs paying a better value to obtain getting the plus is attributable to the market price of the plus keeps increasing year on year. additionally in getting assets, there'll intangible assets like Goodwill that keeps increasing year on year as and once the firm is obtaining established itself. however once there's stock acquisition, we have a tendency to might not pay a better quantity cause; we have a tendency to pay the number on the worth of the stock within the market. Generally, the stock costs aren't true representatives of the corporate assets.

What revenue service code section addresses however sales of assets versus sales of stock area unit taxed? What area unit the many differences?

Ans: revenue Service Code 301 & 302 exlains the current turn up. RS publication provides all the main points of sale of assets vs sale of stocks that area unit taxed. the main points dissent from form of entity to the opposite. each the sections area unit 2 completely different as a result of every focuses on sell and buy of assets

beaWhat amount could the goodwill be subtracted for tax purposes? Why does one assume the interior Revenue Service treats these 2 purchase offers differently?

Ans: A payer shall be entitled to associate degree amortization deduction with reference to any amortizable section 197 intangible. the number of such deduction shall be determined by amortizing the adjusted basis (for functions of crucial gain) of such intangible ratably over the 15-year amount starting with the month during which such intangible was noninheritable . federal agency treats these 2 purchases otherwise attributable to tax implications.

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