Question

In: Accounting

An acquiring corporation transfers property and stock to the target corporation in a reorganization and receives...

An acquiring corporation transfers property and stock to the target corporation in a reorganization and receives the target’s assets in exchange. What type of reorganization is recommended including the relevant tax issues? Please provide specific examples to support your post and discuss the reasons why your recommendation is the most tax efficient.

Solutions

Expert Solution

Such type of reorganization in which the acquiring corporation transfers property and stock to the target corporation and receives target assets in exchange is known as Traingular C Reorganisation.

ASSET STOCK EXCHANGE

TARGET<-------------------------------------- ACQUIRING STOCK<------------------------ACQUIRING

TARGET--------------------------------------->TARGET ASSETS----------------------------->ACQUIRING

STOCK DISTRIBUTION

Target corporation distributes the stock acquired from the acquiring company to the target shareholders.

POST TRANSACTION STRUCTURE

The shareholders that were target shareholders earlier becomes acquiring shareholders after this transaction.

Acquiring company acquires all the assets of the target company in exchange of voting rights of the stock.

Acquiring company can contribute the acquired target assets to a subsidiary.   

Explanation:

Such type of reorganisation structure is used in rare situations specially for tax and non tax reasons.

It involves more amount of cash and consideration.

It is simplest in nature and requires written consnts from creditors in order to transfer all the assets

Example:

A non US client offered to buy all the stock of US corporation for $ 50 million in cash.

The stockholders tax bases in their stock of the target was $7 million so that they would recognize $ 43 million in gain on the sale.

The US Federal and state income taxes would be $10.75 million.

Target stakeholders would be left with $ 39.25 million after taxes.

Afterwards the client dicovered significant contingenet liabilities consisting of tax deficiencies of $15 million.

The client refused to continue .

As an alternative the client offered to purchase all the assets of the target for $50 million and assume all liabilities except the contingent liabilities.

The target basis in assets was $ 40 million and it had liabilities of $35 million.

The taxable gain would be $ 50 million plus assumed liabilities of $35 million making total of $ 85 million less $40million tax basis in the assets for the net gain of $45 million.

Assuming 40 per cent as effective federal and state income tax on gain the target has to pay $18 million of taxes.

This would leave only $32 million for the stockholders.($50 million - $18 million)

As a third alternative, the client will purchase all the assets and assume all other liabilities of the target for $50 million worth of the publicly held voting stock of the non-US client.

The tax benefits to the sellers were materially advantageous.

They would receive the $50 million in value of the client's stock, undiminished by any corporate or personal income taxes.

The client achieved the business ends it was seeking of acquiring all the assets of the target without the need to acquire the specified troubling liabilities.


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