Alpha Corporation purchases 20% of Theta Corporation stock from Milt on August 10 of the current year. Alpha purchases an additional 30% of the stock from Nick on November 15 of the current year. Alpha purchases the remaining 50% of the Theta stock from Phil on April 10 of the following year. The total price paid for the stock is $1.9 million. Theta’s balance sheet on April 10 of the following year shows assets with a $2.5 million FMV, a $1.6 million adjusted basis, and $500,000 in liabilities.
a. What is the acquisition date for the Theta stock for Sec. 338 purposes? By what date must Alpha make the Sec. 338 election?
b. If Alpha makes a Sec. 338 election, what is the aggregate deemed sale price for the assets?
c. What is the total basis of the assets following the deemed sale, assuming a 34% corporate tax rate?
d. How does the tax liability attributable to the deemed sale affect the price Alpha should be willing to pay for the Theta stock?
e. What happens to Theta’s tax attributes following the deemed sale?