Question

Prepare a memo for the file showing the ADSP in a 2018 sale and comparing it to the ADSP from a 2017 sale.

Acquiring Corporation pays $22,000,000 for 100% of Target stock in a single transaction.

Target assets have a tax basis of $12,000,000.

Target liabilities are on the balance sheet at $4,000,000

The ADSP = Stock Purchase Cost + Target Liabilities

Target Liabilities = Non-tax Liabilities + Tax Liability

Tax Liability = .25 (ADSP – Tax Basis of Assets) 2017

Tax Liability = .21 (ADSP – Tax Basis of Assets) 2018

Answer 1

ADSP stands for Aggregate Deemed Sale price:

ADSP refers to the amount for which old company is deemed to have sold its entire owned assets under deemed asset sale i.e. determination of price for which the company would have sold its assets.

How ADSP is computed—ADSP is the aggregate of—

1. The grossed-up amount realized on the sale to the buying corporation; and
2. Liabilities of the old company

Acquiring a business can be cumbersome tasks with all the due-diligence required and all the super fancy terminology and costs of attorneys, however summarising down the same, there are actually only two ways to acquire a business

1. purchase the assets
2. purchase the company's shares

And preferred method is to buy assets as the same provides “Tax base” for depreciation, as in stock purchase the value of price paid to acquire the shares is apportioned according to “Tax base” available and thus leading to excess amount paid to be recorded as Goodwill. Many a times it happens that a buyer cannot purchase target companies’ assets due to non-tax oriented goals like, when the purchased company has major contracts which require retention of legal existence of the company to keep key contracts intact which forces the buyer to purchase the shares, which as mentioned before, buyer loses the tax benefits that come from an asset purchase through “Tax Base”.

Solution to this situation lies in “Section 338(h)(10) election” which can be made when one corporation purchases shares of other corporation, and the election must be made jointly by both the entities.

Considering the present situation;

Acquiring Corporation pays $22,000,000 for 100% of Target stock in a single transaction

Target assets have a tax basis of $12,000,000.

Target liabilities are on the balance sheet at $4,000,000

	2017	2018
ADSP = Stock Purchase Cost + Target Liabilities	22000000+4000000 = 26000000	22000000+4000000 = 26000000
Stock Purchase Cost (for 100% acquisition)	$22,000,000	$22,000,000
Target Liabilities = Non-tax Liabilities + Tax Liability
Tax liability* - .25 (ADSP – Tax Basis of Assets) 2017	$35,00,000
.25 (ADSP – Tax Basis of Assets) 2018		$29,40,000
Non Tax liabilities	4000000-3500000 = 500000	4000000-2940000 = 1060000

*.25 (stock purchase + Target liability) – Tax base of assets)

Net impact can be seen on non-tax liabilities cost