Question

Tax Case 4

Goodwill Acquired in an Acquisition – Is it Deductible?

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

Answers:

Based solely on the “net after-tax” cost of the acquisition, which purchase offer should you choose: A or B? Why?

Ans: With respect to the tax consequences, we should understand the type of corporation, we are acquiring and accordingly the tax implication keeps changing. But with a generic view, we may say that, the tax consequences towards the purchase price of an asset transaction is more than that of a stock transactions. Hence we may opt for the “option – A” for this process.

Why does the seller require a higher price to be paid for acquiring “net assets” versus “stock”?

Ans: The seller requires paying a higher price to pay for acquiring the asset is because of the market value of the asset keeps increasing year on year. Also in acquiring assets, there will intangible assets like Goodwill which keeps increasing year on year as and when the firm is getting established itself. But when there is stock acquisition, we may not pay a higher amount cause; we pay the amount on the price of the stock in the market. Generally, the stock prices are not true representatives of the company assets.

What internal revenue service code section addresses how sales of assets versus sales of stock are taxed? What are the significant differences?

Ans: Internal Revenue Service Code 301 & 302 exlains the present ensue. RS publication gives all the details of sale of assets vs sale of stocks that are taxed. The details differ from type of entity to the other. Both the sections are two different because each focuses on sell and purchase of assets

beaWhat period may the goodwill be deducted for tax purposes? Why do you think the Internal Revenue Service treats these two purchase offers differently?

Ans: A taxpayer shall be entitled to an amortization deduction with respect to any amortizable section 197 intangible. The amount of such deduction shall be determined by amortizing the adjusted basis (for purposes of determining gain) of such intangible ratably over the 15-year period beginning with the month in which such intangible was acquired. IRS treats these two purchases differently because of tax implications.

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Reference URLs

http://www.irs.gov/publications/p544/ch02.html

http://www.irs.gov/publications/p544/ar01.html#en_US_2012_publink1000276618

http://www.irs.gov/pub/irs-pdf/p550.pdf

http://www.law.cornell.edu/uscode/text/26/197