Assume the following factors in assessing the value of preserving NOLs in the acquisition of a target:
• The target corporation has NOLs of $ 675.
• The net basis in the target’s assets is $ 200.
• The cash price an acquirer is willing to pay for the stock of the target is $ 900.
• Target shareholders have a basis in the stock of the target of $ 400.
• The corporate tax rate is 35%.
• The shareholder capital gains tax rate is 20%.
• The after- tax discount rate is 10%.
• Any step- up in the tax basis of the target’s assets is amortized over 10 years on a straight- line basis.
• The appropriate long- term tax- exempt rate applicable to target NOLs under Section 382 is 4%. The target’s NOLs will expire in 20 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. What if the step- up in the tax basis of the target’s assets is amortized straight- line over a 15- year period, and the long- term tax- exempt rate applicable to target NOLs under Section 382 is 4.75%? 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?