Question: It was announced today that Florida Inc will acquire Menlo

It was announced today that Florida, Inc., will acquire Menlo Park, Inc. Menlo Park has assets with a gross tax basis of $ 6 million and has $ 1.5 million of liabilities. Prior to being acquired, Menlo Park had no goodwill on its tax books, although it had approximately $ 2 million of goodwill on its financial statements. Menlo Park’s identifiable assets, which include intangible assets other than goodwill, are estimated by Florida to have a fair market value of $ 22 million, and its liabilities have a fair market value of $ 1.5 million. Menlo Park has two primary classes of shareholders. The first consists of taxable investors, who own 1,200 of Menlo Park’s outstanding shares with an aggregate basis of $ 10 million. For simplicity, assume these stockholders have all held Menlo Park stock more than 12 months and all purchased the stock at the same price. The second consists of various nontaxable entities such as pension funds and certain foreign investors that own the remaining 800 outstanding Menlo Park shares. These stockholders have an aggregate basis of $ 1 million. Neither Florida nor Menlo Park has any net operating loss carryovers, and both face a 35% tax rate. Assume any boot is taxable at capital gains rates of 20%. Florida gives voting common stock in itself in exchange for all of the outstanding stock of Menlo Park, a Section 368 “ B” structure. Menlo Park becomes a wholly owned subsidiary of Florida. At the time of the exchange, the Florida stock given has a market value of $ 20 million.
a. What tax basis will Florida take in the stock of Menlo Park acquired?
b. What tax basis will Menlo Park and Florida through its ownership of Menlo Park have in its net assets following the acquisition? Instead, assume Florida gives voting stock in itself of $ 16 million and $ 5 million in cash, and Menlo Park is merged under state law into a newly created, wholly owned acquisition subsidiary of Florida, called Biscayne, Inc., which is a triangular 368 “ A” structure.
c. Assume the cash and stock portions of the purchase price are prorated so that each Menlo Park shareholder gets a package of cash and Florida stock. That is, every share of Menlo Park stock is exchanged for $ 2,500 cash and $ 8,000 of Florida stock ($ 10,500 of consideration per share of stock multiplied by 2,000 shares outstanding is $ 21 million). How much tax will Menlo Park’s shareholders pay in aggregate at the time of the sale?
d. What tax basis will Florida’s Biscayne subsidiary have in the net assets of Menlo Park?
e. How much tax- deductible goodwill will Florida/ Menlo Park have post acquisition?

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  • CreatedAugust 06, 2015
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