Email: support@bestacademictutors.com

Advanced Federal Taxation

Corporation Problem: Distributions, NOL’s, and Asset vs. Stock deal

Use the following facts and information to assess the federal tax implications of the contemplated business acquisition.

General Information:

Federal Income Tax Rates: Corporate = 35%, Individual = 40%

Individual – Capital Gain Federal Income Tax Rate = 20%

Applicable Federal Rate (AFR) = 5%

Buyer is BIG Corporation and is considering purchasing the assets or stock of SLL Corporation for $80 million.

Seller Information:

2 Shareholders own 100% of SLL Corporation.  The shareholders basis in the stock is $2 million.  SLL Corp has no liabilities and a $10 million Net Operating Loss (NOL) from the previous year.  Below are the assets of SLL Corporation

Assets:                Book/Tax Basis                Fair Market Value

Cash                     $   1,000,000                    $    1,000,000

Inventory           $   4,000,000                    $    4,000,000

Goodwill             $                0                        $ 75,000,000

Total                    $5,000,000                       $80,000,000

Requirements:

  • Stock Acquisition
    • Seller
      • Compute the federal income tax of the corporation
      • Compute the federal income tax of the shareholders

    • Buyer
      • List the tax basis in the assets acquired
      • Indicate the amount of NOL that will carry over to the buyer
  • Asset Acquisition
    • Seller
      • Compute the federal income tax of the corporation
      • Compute the federal income tax of the shareholders
    • Buyer
      • List the tax basis in the assets acquired
      • Indicate the amount of NOL that will carry over to the buyer
  • Recommendations
    • What deal would you recommend to the seller? Buyer? Why?
    • Would your answer to 3(a) change if the seller had stock tax basis of $0 and asset tax bases of  $60 million?  Explain your answer.
    • Would your answer change and why if the SLL corp had a $100m NOL?
    • List the advantages, issues, and concerns of the seller and buyer if SLL were an LLC instead of a corporation. What would happen to the NOL?
    • Is the seller concerned about E&P in a sale of the business transaction?  Explain.
  • The following questions relate to various reading articles.  Please provide brief explanations to each question.
    • List 2 ADVANTAGES OF ASSET PURCHASE TO PURCHASER
    • List 3 DISADVANTAGES OF ASSET PURCHASE TO THE PURCHASER
    • List 3 DISADVANTAGES OF ASSET PURCHASE TO THE SELLER
    • List 2 ADVANTAGES OF STOCK PURCHASE TO THE PURCHASER
    • List 3 ADVANTAGES OF ASSET PURCHASE TO THE SELLER
    • Explain why Congress enacted IRC Section 382
    • What is the definition of an “ownership change” under IRC Section 382.

Leave a Reply

Your email address will not be published. Required fields are marked *

error: Content is protected !!