Vol 02 chapter 7 2012


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Vol 02 chapter 7 2012

  1. 1. Chapter 7 Corporations: Reorganizations
  2. 2. The Big Picture (slide 1 of 3) <ul><li>Rock & Water Corporation (R&W) specializes in industrial park landscaping. </li></ul><ul><li>One of R&W’s central missions is to cause as little negative impact on the environment as possible. </li></ul><ul><ul><li>Until recently, R&W applied this policy only to its own work, but the new CEO, Tony Turner, wants to extend this policy to its suppliers. </li></ul></ul><ul><ul><li>R&W is aware that 3 of its suppliers do not use environmentally sound practices. </li></ul></ul><ul><li>Realizing that simply changing suppliers will not eliminate these polluting practices, </li></ul><ul><ul><li>R&W is considering acquiring these three suppliers. </li></ul></ul><ul><ul><li>Using this strategy, R&W would control the production practices of these corporations. </li></ul></ul>
  3. 3. The Big Picture (slide 2 of 3) <ul><li>R&W is unsure of how to structure these potential acquisitions of its suppliers and seeks your advice. </li></ul><ul><li>R&W gives you the following information about these potential acquisitions. </li></ul><ul><ul><li>BrineCo is a profitable corporation that has been owned predominantly by the Adams family since its incorporation in 1950. </li></ul></ul>
  4. 4. The Big Picture (slide 3 of 3) <ul><ul><li>AcidCo started up in 1967. </li></ul></ul><ul><ul><ul><li>AcidCo has been having legal troubles and has continually been fined since more stringent EPA standards came into existence. </li></ul></ul></ul><ul><ul><ul><li>Besides chemicals used by R&W, AcidCo produces acids for the mining industry. </li></ul></ul></ul><ul><ul><li>Lastly, ChemCo is a new fertilizer producer with the technology to produce environmentally safe products. </li></ul></ul><ul><ul><ul><li>Its management is inexperienced, however, and the result has been inefficiencies in production and unintended harm to its surroundings. </li></ul></ul></ul><ul><ul><ul><li>ChemCo has yet to show a profit. </li></ul></ul></ul><ul><li>How will you advise R&W to approach each of these acquisitions? </li></ul><ul><li>Read the chapter and formulate your response. </li></ul>
  5. 5. Reorganizations—In General <ul><li>Refers to any corporate restructuring that may be tax-free under §368 </li></ul><ul><ul><li>To qualify, must meet certain general requirements: </li></ul></ul><ul><ul><ul><li>Must be a plan of reorganization </li></ul></ul></ul><ul><ul><ul><li>Must meet continuity of interest and continuity of business enterprise tests </li></ul></ul></ul><ul><ul><ul><li>Must have a sound business purpose </li></ul></ul></ul><ul><ul><ul><li>Tax-free status can be denied under step transaction doctrine </li></ul></ul></ul>
  6. 6. Summary of Different Types of Reorganizations <ul><li>The term reorganization includes: </li></ul><ul><ul><li>Statutory merger or consolidation </li></ul></ul><ul><ul><li>Stock for stock exchange </li></ul></ul><ul><ul><li>Stock for assets exchange </li></ul></ul><ul><ul><li>Divisive exchange </li></ul></ul><ul><ul><li>Recapitalization </li></ul></ul><ul><ul><li>Change in identity, form, or place of organization </li></ul></ul><ul><ul><li>Transfers in bankruptcy or receivership </li></ul></ul>
  7. 7. Tax Free Reorganization Consequences, in General (slide 1 of 3) <ul><li>Consequences to Acquiring Corporation </li></ul><ul><ul><li>No gain or loss recognized unless it transfers property to the Target corporation as part of the transaction </li></ul></ul><ul><ul><ul><li>Then gain, but not loss, may be recognized </li></ul></ul></ul><ul><ul><li>Basis of property received retains basis it had in hands of Target corp plus any gain recognized by the target </li></ul></ul>
  8. 8. Tax Free Reorganization Consequences, in General (slide 2 of 3) <ul><li>Consequences to Target Corporation </li></ul><ul><ul><li>No gain or loss unless it retains “other property” received in the exchange or it distributes its own property to shareholders </li></ul></ul><ul><ul><ul><li>Other property is defined as anything received other than stock or securities </li></ul></ul></ul><ul><ul><ul><ul><li>Treated as boot </li></ul></ul></ul></ul><ul><ul><ul><li>Gain, but not loss, may be recognized </li></ul></ul></ul>
  9. 9. Tax Free Reorganization Consequences, in General (slide 3 of 3) <ul><li>Consequences to Target or Acquiring Co. Shareholders </li></ul><ul><ul><li>No gain or loss unless shareholders receive cash or other property in addition to stock </li></ul></ul><ul><ul><ul><li>Cash or other property is considered boot </li></ul></ul></ul><ul><ul><ul><ul><li>Gain recognized by the stockholder is the lesser of the boot received or the realized gain </li></ul></ul></ul></ul><ul><ul><li>Basis of shares received is same as basis of those surrendered, decreased by boot received, increased by gain and dividend income, if any, recognized in the transaction </li></ul></ul>
  10. 10. The Big Picture – Example 4 Gain On Exchange Of Stock (slide 1 of 2) <ul><li>Return to the facts of The Big Picture on p. 7-2. </li></ul><ul><li>R&W proceeds with its acquisition of BrineCo. </li></ul><ul><li>Sam acquired a 30% interest in BrineCo 15 years ago for $80,000. </li></ul><ul><ul><li>He exchanges his BrineCo stock for $25,000 cash and stock in R&W worth $125,000. </li></ul></ul><ul><ul><li>At the time of the reorganization, BrineCo’s E & P is $50,000. </li></ul></ul><ul><li>Sam has a $70,000 realized gain </li></ul><ul><ul><li>$150,000 cash and stock received - $80,000 BrineCo stock basis. </li></ul></ul><ul><li>Sam has a $25,000 recognized gain (cash boot received). </li></ul><ul><ul><li>The first $15,000 ($50,000 BrineCo E & P X 30%) is taxable as a dividend, and </li></ul></ul><ul><ul><li>The remaining $10,000 is treated as capital gain. </li></ul></ul><ul><ul><li>Both are taxed at special tax rates. </li></ul></ul>
  11. 11. The Big Picture – Example 4 Gain On Exchange Of Stock (slide 2 of 2) <ul><li>Suppose instead that Sam receives 10% of the R&W stock with a $100,000 fair market value and $50,000 cash. </li></ul><ul><ul><li>If Sam had received solely stock, he would have received 15% of the R&W stock. </li></ul></ul><ul><ul><li>Since Sam owns less than 80% of the stock he would have owned if solely stock had been distributed (10% ÷ 15% = 67%) and less than 50% of R&W, he qualifies for sale or exchange treatment under § 302(b)(2). </li></ul></ul><ul><li>Therefore, Sam’s $50,000 recognized gain is a long-term capital gain. </li></ul>
  12. 12. Type A Reorganization <ul><li>Includes mergers and consolidations </li></ul><ul><ul><li>Merger is union of two or more corporations </li></ul></ul><ul><ul><ul><li>One corporation retains it existence and absorbs the others </li></ul></ul></ul><ul><ul><li>Consolidation occurs when a new corporation is created to take the place of two or more corporations </li></ul></ul>
  13. 13. Type A Reorganization (slide 1 of 2)
  14. 14. Type A Reorganization (slide 2 of 2)
  15. 15. The Big Picture – Example 11 ‘‘Type A’’ Reorganization <ul><li>Return to the facts of The Big Picture on p. 7-2. </li></ul><ul><li>The Rock & Water Corporation (R&W) formation occurred as follows. </li></ul><ul><ul><li>Roca and Agua Corporations were united under state law into new R&W Corporation by transferring all of their assets to R&W in exchange for all of R&W’s stock. </li></ul></ul><ul><ul><li>By operation of state law, Roca and Agua liquidated by distributing R&W stock to their shareholders in exchange for the shareholders’ stock in Roca and Agua. </li></ul></ul><ul><ul><li>This ‘‘Type A’’ reorganization is a consolidation. </li></ul></ul>
  16. 16. Type A Reorganization Issues (slide 1 of 2) <ul><li>Advantages: </li></ul><ul><ul><li>Type A reorganization is flexible </li></ul></ul><ul><ul><li>Consideration need not be voting stock </li></ul></ul><ul><ul><li>Money or other property can be transferred without disqualifying the transaction, as long as “continuity of interest” is met </li></ul></ul>
  17. 17. Type A Reorganization Issues (slide 2 of 2) <ul><li>Disadvantages: </li></ul><ul><ul><li>Money or other property transferred is “boot” so some gain may be required to be recognized </li></ul></ul><ul><ul><li>Shareholders of either entity may dissent; in most states their shares must be redeemed </li></ul></ul><ul><ul><li>Acquiring entity must assume all liabilities of Target </li></ul></ul>
  18. 18. Type B Reorganization (Stock-for-Stock Reorganization)
  19. 19. The Big Picture – Example 12 ‘‘Type B’’ Reorganization <ul><li>Return to the facts of The Big Picture on p. 7-2. </li></ul><ul><li>R&W Corporation proceeds with the acquisition of AcidCo. </li></ul><ul><ul><li>In the transaction between R&W and AcidCo shareholders, 20% of R&W voting stock is exchanged for 90% of all classes of stock in AcidCo. </li></ul></ul><ul><li>The exchange qualifies as a ‘‘Type B’’ reorganization. </li></ul><ul><li>R&W becomes the parent of AcidCo. </li></ul>
  20. 20. Type B Reorganization Requirements (slide 1 of 4) <ul><li>Corporation acquires stock of Target solely in exchange for its own voting stock (stock for stock) </li></ul><ul><ul><li>Acquiring corporation must acquire “control” of Target </li></ul></ul><ul><ul><ul><li>Control is ownership of at least 80% of all classes of stock of target </li></ul></ul></ul><ul><ul><ul><li>Acquirer may add shares owned previously with shares acquired in reorganization </li></ul></ul></ul>
  21. 21. Type B Reorganization Requirements (slide 2 of 4) <ul><li>Acquiring corporation may acquire shares from either: </li></ul><ul><ul><li>(1) Shareholders of Target, or </li></ul></ul><ul><ul><li>(2) Directly from Target </li></ul></ul><ul><li>Exception to the “solely for voting stock” requirement when shareholders must receive fractional shares </li></ul><ul><ul><li>May receive cash rather than fractional shares in the acquiring corporation </li></ul></ul>
  22. 22. Type B Reorganization Requirements (slide 3 of 4) <ul><li>Example: Assume Target has 100 shares outstanding: </li></ul><ul><ul><li>Acquirer may obtain 80 shares from current Target shareholders in exchange for Acquirer’s voting stock </li></ul></ul><ul><ul><li>Target may also issue 400 new shares to Acquirer in exchange for Acquirer’s voting stock (500 shares would be outstanding) </li></ul></ul>
  23. 23. Type B Reorganization Requirements (slide 4 of 4) <ul><li>Consideration paid by Acquirer can only include Acquirer’s voting stock or transaction does not qualify </li></ul>
  24. 24. Type C Reorganization (Stock-for-Assets Reorganization)
  25. 25. Type C Reorganization Requirements (slide 1 of 3) <ul><li>A ‘‘Type C’’ reorganization is essentially an exchange of voting stock for assets followed by liquidation of the target corporation </li></ul><ul><ul><li>Called a “Stock-for-Assets” reorganization </li></ul></ul><ul><ul><li>Transfer is generally between the entities, not the shareholders </li></ul></ul>
  26. 26. Type C Reorganization Requirements (slide 2 of 3) <ul><li>Consideration paid by Acquirer normally consists only of voting stock </li></ul><ul><ul><li>However, if at least 80% of FMV of Target is acquired with voting stock, cash or other property can be used for remainder </li></ul></ul><ul><ul><li>Limitation: liabilities assumed by Acquirer are considered “other property” if any additional “other property” is used </li></ul></ul>
  27. 27. Type C Reorganization Requirements (slide 3 of 3) <ul><li>“Substantially all” of Target’s assets must be transferred to Acquirer </li></ul><ul><li>There is no statutory definition of ‘‘substantially all’’ </li></ul><ul><ul><li>To receive a favorable ruling from the IRS, the target must transfer at least 90% of net asset value or 70% of the gross asset value to the acquiring corporation </li></ul></ul>
  28. 28. The Big Picture – Example 14 ‘‘Type C’’ Reorganization <ul><li>Return to the facts of The Big Picture on p. 7-2. </li></ul><ul><li>R&W Corporation proceeds with the acquisition of ChemCo. </li></ul><ul><ul><li>R&W transfers voting stock representing a 30% ownership interest to ChemCo for substantially all of ChemCo’s assets. </li></ul></ul><ul><ul><li>After the exchange, ChemCo’s only assets are cash and R&W voting stock. </li></ul></ul><ul><ul><li>ChemCo distributes the R&W stock and cash to its shareholders in exchange for their ChemCo stock. </li></ul></ul><ul><li>The exchange qualifies as a ‘‘Type C’’ reorganization if ChemCo liquidates after the distribution. </li></ul><ul><li>The exchange is taxable to the shareholders to the extent of the cash they received. </li></ul>
  29. 29. Type D Reorganization (slide 1 of 4) <ul><li>Generally a mechanism for corporate division </li></ul><ul><ul><li>Called a “divisive reorganization” but can be used to carry out a corporate combination </li></ul></ul><ul><ul><li>In a Type D acquisitive reorganization </li></ul></ul><ul><ul><ul><li>Entity transferring assets is considered the acquiring corporation </li></ul></ul></ul><ul><ul><ul><li>Corporation receiving the property is the target </li></ul></ul></ul>
  30. 30. Type D Reorganization (slide 2 of 4) <ul><li>In an acquisitive Type D reorganization </li></ul><ul><ul><li>Substantially all of acquiring corp’s property must be transferred to target corporation </li></ul></ul><ul><ul><li>The acquiring corp must be in control (at least 50%) of the target </li></ul></ul><ul><ul><li>Target stock received by the acquiring corp and any remaining assets of acquiring corp must be distributed to its shareholders </li></ul></ul><ul><ul><li>Acquiring corporation must liquidate </li></ul></ul>
  31. 31. Type D Reorganization (slide 3 of 4) <ul><li>In a divisive Type D reorganization </li></ul><ul><ul><li>A corporation is divided </li></ul></ul><ul><ul><li>One or more new corps are formed to receive assets of original corp </li></ul></ul><ul><ul><li>Original corp must receive stock representing control (80%) of new corps </li></ul></ul><ul><ul><li>Stock of new corps is then distributed to shareholders of original corp </li></ul></ul>
  32. 32. Type D Reorganization (slide 4 of 4) <ul><li>Three types of divisive “Type D” reorganizations </li></ul><ul><ul><li>Spin-Off and Split-Off </li></ul></ul><ul><ul><ul><li>A new corporation is formed to receive some of the assets of the original corporation in exchange for the new corporation's stock </li></ul></ul></ul><ul><ul><li>Split-Up </li></ul></ul><ul><ul><ul><li>Two or more corporations are formed to receive substantially all of the assets of the original corporation </li></ul></ul></ul>
  33. 33. Type D Reorganization Spin-Off (slide 1 of 2)
  34. 34. Type D Reorganization Spin-Off (slide 2 of 2)
  35. 35. Type D Reorganization Split-Off (slide 1 of 2)
  36. 36. Type D Reorganization Split-Off (slide 2 of 2)
  37. 37. Type D Reorganization Split-Up (slide 1 of 2)
  38. 38. Type D Reorganization Split-Up (slide 2 of 2)
  39. 39. The Big Picture – Example 23 ‘‘Type D’’ Split-up (slide 1 of 2) <ul><li>Return to the facts of The Big Picture on p. 7-2. </li></ul><ul><li>R&W Corporation proceeds with its acquisition of AcidCo. </li></ul><ul><li>Gail and Gary are equal shareholders of AcidCo, which was organized six years ago. </li></ul><ul><li>To prepare for the restructuring transaction with R&W, AcidCo creates two new corporations to receive its business lines. </li></ul><ul><ul><li>AbraseCo will receive all of the assets related to the landscaping chemical business. </li></ul></ul><ul><ul><ul><li>These are the assets desired by R&W. </li></ul></ul></ul><ul><ul><li>The remaining mining acid assets are transferred to MineCo. </li></ul></ul>
  40. 40. The Big Picture – Example 23 ‘‘Type D’’ Split-up (slide 2 of 2) <ul><li>The AbraseCo and MineCo stock received in exchange for AcidCo’s assets is transferred equally to Gary and Gail in exchange for all of their shares in AcidCo. </li></ul><ul><ul><li>Gail and Gary now are 100% owners of both AbraseCo and MineCo. </li></ul></ul><ul><li>Having no assets, AcidCo liquidates. </li></ul><ul><li>This transaction qualifies as a ‘‘Type D’’ split-up. </li></ul><ul><ul><li>Neither Gary nor Gail recognizes any gain or loss on the exchange. </li></ul></ul><ul><ul><li>Gary and Gail take a basis in the AcidCo stock equal to their basis in the stock of AbraseCo and MineCo. </li></ul></ul><ul><ul><li>The allocation between AbraseCo and MineCo is performed in the manner utilized in Examples 21 and 22. </li></ul></ul>
  41. 41. Type E Reorganization (slide 1 of 2) <ul><li>Type E reorganization is a recapitalization </li></ul><ul><ul><li>Involves a major change in character and amount of outstanding stock, securities, or paid-in-capital </li></ul></ul><ul><li>The following exchanges qualify: </li></ul><ul><ul><li>Bonds for stock </li></ul></ul><ul><ul><li>Stock for stock </li></ul></ul><ul><ul><li>Bonds for bonds </li></ul></ul>
  42. 42. Type E Reorganization (slide 2 of 2) <ul><li>Corporation can exchange its common stock for preferred stock or its preferred stock for common stock tax-free </li></ul><ul><ul><li>The exchange of bonds for other bonds is tax-free when the debt received has a principal amount that is not more than the surrendered debt’s principal amount </li></ul></ul>
  43. 43. The Big Picture – Example 25 ‘‘Type E’’ Reorganization <ul><li>Return to the facts of The Big Picture on p. 7-2. </li></ul><ul><li>BrineCo’s stock is owned 80% by Gomez Adams and 20% by his children. </li></ul><ul><ul><li>Gomez wants to relinquish his corporate control to his children. </li></ul></ul><ul><li>He exchanges his common voting stock for nonvoting preferred stock. </li></ul><ul><li>The exchange qualifies as a ‘‘Type E’’ reorganization. </li></ul><ul><ul><li>However, any difference in value between stock received and stock surrendered could be treated as compensation to Gomez or as a gift to Gomez’s children. </li></ul></ul>
  44. 44. Type F Reorganization <ul><li>A mere change in identity, form, or place of organization, however effected </li></ul><ul><ul><li>Restricted to a single operating corporation </li></ul></ul><ul><ul><li>Tax characteristics of predecessor corp carry over to successor corp </li></ul></ul><ul><ul><li>Does not jeopardize status of §1244 stock or terminate a valid S corp election </li></ul></ul>
  45. 45. Type G Reorganization <ul><li>Substantially all of the assets of debtor corp are transferred to an acquiring corp in exchange for its stock and securities </li></ul><ul><ul><li>This stock and securities are distributed to the senior creditors in exchange for their claims against the debtor corporation </li></ul></ul>
  46. 46. Judicial Doctrines (slide 1 of 2) <ul><li>Besides meeting specific requirements of reorganization, several judicially created doctrines must be met </li></ul><ul><ul><li>Reorganization must exhibit a sound business purpose </li></ul></ul><ul><ul><ul><li>Not a well defined test </li></ul></ul></ul><ul><ul><li>Continuity of interest test </li></ul></ul><ul><ul><ul><li>IRS deems this test met if shareholders of Target receive stock in Acquirer equal to at least 40% of their prior stock ownership in Target stock </li></ul></ul></ul>
  47. 47. Judicial Doctrines (slide 2 of 2) <ul><ul><li>Continuity of business enterprise test </li></ul></ul><ul><ul><ul><li>Requires the acquiring corp to either: </li></ul></ul></ul><ul><ul><ul><ul><li>Continue the Target’s historic business, or </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Use a significant portion of Target’s assets in business </li></ul></ul></ul></ul><ul><ul><li>Step transaction doctrine </li></ul></ul><ul><ul><ul><li>Ensures that a series of transactions are not used to obtain tax benefits that would be unavailable if the transaction were accomplished in a single step </li></ul></ul></ul><ul><ul><ul><li>IRS generally views any transactions occurring within one year of reorganization as part of the restructuring </li></ul></ul></ul>
  48. 48. Carryover of Corporate Tax Attributes (slide 1 of 4) <ul><li>Assumption of liabilities </li></ul><ul><ul><li>Acquiring corp either assumes liabilities of Target or takes property subject to liabilities </li></ul></ul><ul><li>Allowance of Carryovers </li></ul><ul><ul><li>In Type A, C, acquisitive D, and G reorganizations, the Target’s tax attributes are acquired </li></ul></ul><ul><ul><li>In Type B, E, and F reorganizations, Target corporation remains intact and retains its tax attributes </li></ul></ul>
  49. 49. Carryover of Corporate Tax Attributes (slide 2 of 4) <ul><li>NOL Carryovers </li></ul><ul><ul><li>Amount of NOL that can be used in year ownership change occurs is limited to a percentage representing the remaining days in the tax year over the total number of days in the year </li></ul></ul>
  50. 50. Carryover of Corporate Tax Attributes (slide 3 of 4) <ul><li>NOL Carryovers (cont’d) </li></ul><ul><ul><li>NOL can be further limited in first and succeeding years when there is a more than 50-percentage-point ownership change </li></ul></ul><ul><ul><ul><li>An ownership change takes place on the day (change date) that either an equity structure shift or an owner shift occurs </li></ul></ul></ul><ul><ul><ul><ul><li>An equity structure shift occurs when a tax-free reorganization causes an owner shift </li></ul></ul></ul></ul><ul><ul><ul><ul><li>An owner shift is any change in the common stock ownership of shareholders owning at least 5% </li></ul></ul></ul></ul><ul><ul><li>NOL can be used to the extent of the value of the loss corp’s stock on the date of the ownership change multiplied by the long-term tax-exempt rate </li></ul></ul>
  51. 51. Carryover of Corporate Tax Attributes (slide 4 of 4) <ul><li>Earnings and Profits </li></ul><ul><ul><li>Positive E & P of acquired corp carries over </li></ul></ul><ul><ul><li>E & P of a deficit corp is deemed received by acquiring corp as of change date </li></ul></ul><ul><ul><ul><li>Deficit may only be used to offset E & P accumulated by successor corporation after the change date </li></ul></ul></ul>
  52. 52. The Big Picture – Example 33 Net Operating Loss Carryovers <ul><li>Return to the facts of The Big Picture on p. 7-2. </li></ul><ul><li>R&W Corporation proceeds with its acquisition of ChemCo. </li></ul><ul><li>Prior to the merger, ChemCo accumulated a $3 million NOL. </li></ul><ul><li>After the reorganization, R&W generates $5 million of taxable income. </li></ul><ul><ul><li>ChemCo’s $3 million NOL carries over to offset the $5 million taxable income, reducing it to $2 million. </li></ul></ul><ul><ul><li>R&W saves $1,020,000 in Federal income taxes by being able to utilize ChemCo’s NOL carryover ($3 million NOL carryover X 34%). </li></ul></ul><ul><li>Thus, the $3 million NOL is a valuable asset that may be worth more than $1 million to R&W. </li></ul>
  53. 53. The Big Picture – Example 41 Carryovers Limited By § 382 (slide 1 of 2) <ul><li>Return to the facts of The Big Picture on p. 7-2. </li></ul><ul><li>R&W Corporation proceeds with the acquisition of ChemCo. </li></ul><ul><ul><li>It acquires $100,000 of general business credits from ChemCo. </li></ul></ul><ul><li>Assume that the § 382 limitation for the year is $200,000. </li></ul><ul><ul><li>R&W’s taxable income is $800,000 before applying this limitation. </li></ul></ul><ul><li>If the full deduction allowable by § 382 were utilized, R&W’s taxable income would be $600,000 ($800,000 - $200,000). </li></ul>
  54. 54. The Big Picture – Example 41 Carryovers Limited By § 382 (slide 2 of 2) <ul><li>The amount of general business credit that R&W may take in the current year is $68,000, computed as follows. </li></ul><ul><ul><li>Step 1. Regular tax liability </li></ul></ul><ul><ul><li>($800,000 X 34% tax rate) $272,000 </li></ul></ul><ul><ul><li>Step 2. Tax liability with full § 382 </li></ul></ul><ul><ul><li>limitation ($600,000 X 34% tax rate) 204,000 </li></ul></ul><ul><ul><li>Step 3. Subtract step 2 from step 1 $ 68,000 </li></ul></ul>
  55. 55. Comparison of Reorganization Types (slide 1 of 5)
  56. 56. Comparison of Reorganization Types (slide 2 of 5)
  57. 57. Comparison of Reorganization Types (slide 3 of 5)
  58. 58. Comparison of Reorganization Types (slide 4 of 5)
  59. 59. Comparison of Reorganization Types (slide 5 of 5)
  60. 60. Refocus On The Big Picture (slide 1 of 6) <ul><li>Rock & Water Corporation (R&W) is unsure how to structure the potential acquisitions of its three suppliers. </li></ul><ul><li>The first target is BrineCo, a profitable corporation that has been owned predominantly by the Adams family since its incorporation in 1950. </li></ul><ul><li>In negotiations with BrineCo, R&W determines that </li></ul><ul><ul><li>BrineCo has virtually no debt, </li></ul></ul><ul><ul><li>Senior Adams family members are ready to retire, and </li></ul></ul><ul><ul><li>The younger generation has no interest in the business. </li></ul></ul><ul><li>Consequently, all members would like some cash in the transaction. </li></ul>
  61. 61. Refocus On The Big Picture (slide 2 of 6) <ul><li>The ‘‘Type A’’ reorganization would be a good choice for this acquisition. </li></ul><ul><ul><li>R&W can exchange cash, preferred stock, and voting stock for only those assets it wants to acquire. </li></ul></ul><ul><li>Since BrineCo has few liabilities, acquiring all of them will not be an issue nor will obtaining the approval of the BrineCo shareholders. </li></ul><ul><li>The assets not transferred to R&W will be distributed to the Adams family, along with the stock and cash received from R&W in complete liquidation of BrineCo. </li></ul>
  62. 62. Refocus On The Big Picture (slide 3 of 6) <ul><li>The next target, AcidCo, has been struggling financially and has legal liability issues related to its failure to meet environmental standards. </li></ul><ul><li>Its landscaping chemical and mining acid lines of business are active and have been in existence for more than five years, </li></ul><ul><ul><li>AcidCo can, through a divisive ‘‘Type D’’ reorganization, spin off or split off its mining acid business and retain the landscaping chemical line. </li></ul></ul><ul><li>Once this is accomplished, R&W can acquire AcidCo stock from its shareholders by exchanging R&W voting stock in a ‘‘Type B’’ reorganization. </li></ul><ul><ul><li>This restructuring would protect R&W’s assets from AcidCo’s legal liability issues until R&W can clean up the environmental problems. </li></ul></ul>
  63. 63. Refocus On The Big Picture (slide 4 of 6) <ul><li>Lastly, ChemCo has the technology to produce environmentally safe products, but its inexperienced management has resulted in it being unprofitable. </li></ul><ul><li>R&W can use a ‘‘Type C’’ reorganization to acquire substantially all of ChemCo’s assets and can select which liabilities it assumes. </li></ul><ul><ul><li>To avoid having the liability assumption treated as boot, R&W should use solely voting stock for the exchange. </li></ul></ul><ul><li>ChemCo must terminate after the reorganization. </li></ul>
  64. 64. Refocus On The Big Picture (slide 5 of 6) <ul><li>ChemCo has NOL, capital loss, and business credit carryovers </li></ul><ul><ul><li>R&W must be sure to meet the continuity of business enterprise requirement for at least two years. </li></ul></ul><ul><li>Most likely the § 382 limitation will apply </li></ul><ul><ul><li>ChemCo shareholders will experience an equity structure shift of greater than 50 percentage points. </li></ul></ul><ul><ul><li>Thus, the amount of carryover tax attributes that R&W may use in any one year will be limited. </li></ul></ul>
  65. 65. Refocus On The Big Picture (slide 6 of 6) <ul><li>A net present value analysis should be performed to determine what R&W is willing to pay for ChemCo’s tax attributes. </li></ul><ul><li>Finally R&W will need to keep two E & P accounts. </li></ul><ul><ul><li>One for its pre-reorganization E & P, and </li></ul></ul><ul><ul><li>Another with ChemCo’s negative E & P that will be offset by future profits of the combined company. </li></ul></ul>
  66. 66. <ul><li>If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact: </li></ul><ul><li>Dr. Donald R. Trippeer, CPA </li></ul><ul><li>[email_address] </li></ul><ul><li>SUNY Oneonta </li></ul>