Assume the following factors in assessing the sensitivity of the optimal acquisition structure when the target has NOLs:
• The target corporation (a freestanding C corporation) has NOLs of $ 16,500.
• The net basis in the target’s assets is $ 1,800.
• The cash price an acquirer is willing to pay for the stock of the target is $ 19,275.
• Target shareholders have a basis in the stock of the target of $ 4,000.
• The corporate tax rate is 35%.
• The shareholders capital gains tax rate is 20%.
• The after- tax discount rate is 7%.
• Any step- up in the tax basis of the target’s assets is amortized over 15 years on a straight- line basis.
• The appropriate long- term tax- exempt rate applicable to target NOLs under Section 382 is 5%. The target’s NOLs will expire in 12 years.
a. Should the acquirer make a Section 338 election and use the target’s NOLs to offset any gain on the step- up, or should it forgo the election and preserve the target’s NOLs?
b. Now instead assume the after- tax discount rate is 9%. What structure— to make or forgo the Section 338 election— do you recommend?
c. Starting with the part (a) assumptions, assume instead the target’s NOLs expire in 17 years and the after- tax discount rate is 7%. What structure— to make or forgo the Section 338 e­lection— do you recommend?
d. Starting with the part a assumptions, assume instead the step- up in the tax basis of the target’s assets is amortized over 20 years and the after- tax discount rate is 11%. What structure— to make or forgo the Section 338 election— do you recommend?