Stock Or Asset Acquisitions : Basic Tax Implications

If the acquisition will meet the requirements of an affiliated group, such as the manufacturing company would own at least 80% of voting power and value of its largest supplier then they can opt to file single consolidated tax return. The Internal Revenue Service doesn't require corporations to file consolidated tax returns with their subsidiaries, but it permits them to do so. But even if the corporation satisfies the eligibility requirements, still the President must weigh the advantages against the disadvantages of filing a consolidated return with the acquired corporation in which they have ownership interests. Some of the advantages of filing a consolidated return is that the losses of one corporation can offset the profit of another

Hoffman, W., Maloney, D., Raabe, W., & Young, J. (2013). Federal Taxation Comprehensive Volume. (36 ed.). Ohio: South-W

1) Section 351: Since Individual will be in control (80%+ ownership) of future corporation, he will not incur a taxable event

Once a gain or loss is recognized, a taxpayer must determine how the recognized gain or loss affects the taxpayer’s tax liability. The character depends on a combination of two factors: purpose or use of the asset and holding period. The purpose or use of the asset is important because the law does not treat all assets equally. The general use categories are: (1) trade or business, (2) for the production of income (rental activities), (3) investment, and (4) personal. Based on these criteria, we can categorize an asset into one of three groups: (1) ordinary, (2) capital, or (3) section 1231. Characterizing the gain or loss is important because all gains and losses are not equal. Ordinary gains and losses are taxed at ordinary income rates, regardless of the holding

• Transaction structures—the takeover could involve a cash offer, a share offer, an asset swap or a combination of these methods. Need to consider legal, taxation and accounting issues.

The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 38 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project.

Section 1.368-2(c) of the Income Tax Regulations provides: In order to qualify as a "reorganization" under section 368(a)(1)(B), the acquisition by the acquiring corporation of stock of another corporation must be in exchange solely for all or a part of the voting stock

Section 351 of the Internal Revenue code allows a taxpayer to obtain non-recognition of gain or loss when property is transferred solely in exchange for stocks and immediately after the transfer, the transferor or transferors are in control of the corporation. This does not include non-qualified stock as provided under §351(g), however. As described above, each party transferred to the corporation qualifying tangible assets that are established as “property” for rules governing transfers to corporations. Moreover, directly after the exchange both shareholders obtained control of the corporation by satisfying the requirement of I.R.C. §368(c). Section 368 (c), defines control as holding at least 80% of the total combined voting power of all

Corporate reorganization is definitely an available option. The company should be structured as a parent-subsidiary controlled group. The restructuring should be performed in conformance to any and all tax-saving codes and provisions.

Maria and Jason, along with Robert and Elizabeth, must focus first on the initial setup of the organizational structure and the tax consequences on the corporation and individually before addressing the other factors of the organization, which are simple and easily addressed by discussing individual and group objectives. The first point to address is the IRC Section 351 limitation of 80% control of the corporation. Maria nor Jason are interested in decreases their control of the corporation and the best approach is for Robert and Elizabeth to contribute their proposed transactions and being taxed of on the gains at their marginal tax rate. Otherwise, it is best for Robert and Elizabeth to reevaluate their proposed transactions in order minimize the tax consequences. The IRC Section 351 limitation only pertains to an even exchange of property, weather property or cash, for corporate stock and 80% control of the corporation (IRC Section 351, n.d.).

Section 351(c)(2) allows shareholders to dispose of all or part of the transfers stock without preventing the corporations Section 351 transaction from satisfying the “ control immediate after” requirement (4). Section 351(d) states that there are times when services, certain indebtedness, and accrued interest not treated as property as per James v. Commissioner, 53 T.C. 63 (1969); cf. Hospital Corporation of America v. Commissioner, 81 T.C. 520

e. A parent’s less-than-wholly-owned subsidiary issues its shares in exchange for shares of another subsidiary previously owned by the same parent, and the noncontrolling shareholders are not party to the exchange. That is not a business combination from the perspective of the parent.

Section 368(a)(1) of the tax code provides several options for corporate reorganizations. Section 368(a)(1)(d), also known as a “divisive D reorganization”, is the best choice for this particular situation. In a divisive “D” reorganization, the controlling corporation (in this case, BackBone) will distribute assets (the Willow office) to a newly formed subsidiary corporation, in exchange for the stock of the new subsidiary corporation, in a transaction that qualifies under section 355 (Sec. 368(a)(1)(d)). After the transaction is complete, the Willow office will be its own corporation which is wholly (or at least mostly) owned by BackBone. BackBone will also still own and control the Troy, Union and Vista offices after the reorganization.

The statement of reserves should be reviewed, since the acquisition of the tavern, through the purchase of the seller’s interest, results in the buyer, Ms. Growne accepting both known and unknown liabilities of the business prior to her ownership. In addition, by reviewing the financial statements to look at the net operating gain or loss, Ms. Growne can determine if there is a loss she can offset against her other sources of income. For some individuals, the idea of being able to offset other income with these losses incurred prior to ownership is appealing, due to the tax benefit that may result. However, if the buyer does not have significate income to be offset or is not in a higher tax brackets, this benefit of the acquisition through interest becomes less attractive. In addition, if the sellers basis in the assets are significantly less than the assets fair market value, the buyer is likely to incur greater gains on the assets in the future, resulting in a higher taxable income and leading to negative tax implication. In contrast, if the assets of the business were purchased, the buyer would not be susceptible to prior liabilities and the seller must examine their basis for each asset, compare it with the assets current market value, and incur any applicable gains or losses, intern shifting the tax consequences of an increase in

In this composition, we will be discussing two topics that go hand in hand when it is dealt with in tax accounting. To fully understand the scope of this article, passive activity is defined by the IRS as “any rental activity or any business in which the taxpayer gains income but does not materially participate in the activity”(IRS). Examples of passive activities can include equipment leasing and real estate leasing, in contrast to salaries, wages which are generally considered non-passive activities. As the article “Skip the dorm, buy your kid a condo” states, there are tax benefits when renting a property, but now individuals have exploited loopholes in the tax code that can be controversial and even illegal.