Question

Acquisition Homework Problem: Asset vs. Stock deal Use the following facts and information to assess the federal tax implications of the contemplated business acquisition.

General Information: Federal Income Tax Rates: Corporate = 35%, Individual = 40% Individual – Capital Gain Federal Income Tax Rate = 20% Buyer is AX Corporation and is considering purchasing the assets or stock of QZ Corporation for $10 million.

Seller Information: 10 Shareholders own 100% of QZ Corporation. The shareholders basis in the stock is $3 million.

QZ Corp has no liabilities and a $2 million Net Operating Loss (NOL) from the previous year.

Below are the assets of QZ Corporation Assets:

Book/Tax Basis :Cash $ 100,000,Inventory $ 900,000 ,Goodwill $ 0,Total $1,000,000

Fair Market Value: Cash $ 100,000,Inventory $ 900,000 ,Goodwill $ 9,000,000,Total $1,000,000

Requirements: 1) Stock Acquisition a) Seller i) Compute the federal income tax of the corporation ii) Compute the federal income tax of the shareholders b) Buyer i) List the tax basis in the assets acquired ii) Indicate the amount of NOL that will carry over to the buyer

2) Asset Acquisition a) Seller i) Compute the federal income tax of the corporation ii) Compute the federal income tax of the shareholders b) Buyer i) List the tax basis in the assets acquired ii) Indicate the amount of NOL that will carry over to the buyer

3) Recommendations a) What deal would you recommend to the seller? Buyer? b) Would your answer change and why if the QZ corp had a $10m NOL? c) If the companies could not agree on an asset/stock deal,  how might they reach a compromise?

Answer 1

Solution:
1)	Stock Acqusistion:
a)	Seller:
i)	Tax Liability of the Corporation:
	The sale proceeds of the stocks are received by the shareholders. So there is no tax liability
	for the corporate due to sale of stock.
ii)	Federal income tax to the shareholders:
	Particulars	Amount($) in million
	Net Proceeds	10
	Less: shareholders basis	3
	LTCG	7
	Tax rate @ 20%	1.4
	So net proceeds after tax	8.6
b)	Buyer:
i)	List the tax basis in the assets acquired
	Cash	$100000
	Inventory	$900000
	Goodwill	0
	Total	$1000000
ii)	NOL carryover that will carry over to the buyer is $2 million.
2)	Assets Acquistion:
a)	Seller:
i)	Compute the federal income tax of the corporation
	Particulars	Amount($) in million
	Proceeds	10
	Less: Assets Basis	1
	Gain	9
	NOL utilization = (9-2) = 7 million.
	Federal tax rate = 35%
	Federal tax= (7*35%) = $2.45
	So net Proceed= $(10-2.45) = $ 7.55 million.
ii)	Compute the federal income tax of the shareholders
	Liqudating Distribution	$7.55 million
	Less: Stock Basis	$3 million
	Gain	$4.55 million
	Fedral Tax Rate	20%
	Federal Tax	$0.91
b)	Buyer:
i)	List the tax basis in the assets acquired
	Cash	$100000
	Inventory	$900000
	Goodwill	$9000000
	Total	$10000000
ii)	NOL carryover that will carry over to the buyer is $ 0.
3)	Recommendation:
a)	For the Seller point of view the assets acqusistion deal is beneficial as the same provide the higher sale proceeds.
	For the buyer point of view the stock acquisition deal is beneficial as the same require less cost in compare with assets acquisition deal.
b)	Yes if the net loss is 10million then the decision will be changed as the same will make impact on the net proceeds.
c)	They should negotiate with each other and take decision according with this.