Question

n general, for an acquisition to be regarded as tax-free acquisition, these conditions should be met:
I- Shareholders of the target firm must receive an equity interest in the acquisition
II- The acquisition should be for business purpose and not to avoid taxes
III- The acquiring firm should offer cash payment for the equity of the target firm
IV- Continuity of equity interest

	1) I, II and III only
	2) I, II and IV only
	3) II, III and IV
	4) All of the above

Answer 1

In general, for an acquisition to be regarded as tax-free acquisition, these conditions should be met:
I- Shareholders of the target firm must receive an equity interest in the acquisition
II- The acquisition should be for business purpose and not to avoid taxes
III- The acquiring firm should offer cash payment for the equity of the target firm
IV- Continuity of equity interest

Ans :

2) I, II and IV only

Explanation

Tax free acquisition is basically purchase of Target Company in which recognition of Gain can be deferred. This deferral of Gain is considered important as it delays the payment of income taxes.

In order to qualifiy for Tax fress acqusiition, thera are certain condition which are required to be met..

The transaction must incorporate the following concept of IRS (Internal Revenue Service) approved acquisition structure before Gain deferral is allowed.

Bonafide Purpose :The Proposed Transaction i.e. Acquisition should have a genuine business purpose rathar than a mechanism for complete avoidance of taxes.

Continuity of Interest : The shareholder of Target company must receive a significant amount of stock in the acquiring entity in order to have a continuing financial interest in it.

Continuity of Business Enterprise : The acquirer must either continue to operate historical business of Target company or at least use a significant portion of the Target's assets in its current business for two years after the transaction.

There are IRS Acquisition Model which can be use to defer income taxes. They are describe as Type A, B, C, or D reorganistion or acquisition types.

In these acquisition types, requirement to be fulfilled in order to qualify for different types of tax free acquisition are given where it is made clear that certain minimum percentage of stock must be compulsorily used for payment for the equity. And it is no where implies that acquiring firm should offer cash payment for the equity of the Target firm.

Hence, option " 2 " is the correct answer as it goes with the above analysis.