Research issues: one team member should investigate each of the following issues. Another team member will serve
Question:
- Research issues: one team member should investigate each of the following issues. Another team member will serve as a “checker” to see if he/she agrees with the conclusions of the research.
- A central issue that drives much of the results is whether the acquisition qualifies as a “reorganization” under § 368. One team member needs to determine if this transaction qualifies as an A, B or C reorganization under that code section. A tangential issue is whether it is OK to use nonvoting preferred stock in the reorganization transaction.
- Refer to the Projected Book Income Statement on page 3 of the case. The projected loss includes merger-related expenses of $50,000. One team member will research the deductibility of these expenses. Andy thinks there was a US Supreme Court case that addressed this issue. He does not remember the name of the case or its ruling.
- Another team member should investigate whether the IRS could or will use the step transaction doctrine to recharacterize the merger into a form that results in it failing to qualify for tax deferral. You will need to examine IRS Revenue Rulings (and maybe Revenue Procedures and/or Letter Rulings…but start with Revenue Rulings).
- Are there any corporate tax provisions that limit the use of net operating losses (NOLs) after an acquisition? (The rationale for such a limitation is that the NOL rules were intended to “smooth out” taxable income for a single firm over several years of its life. The rules were not intended to generate tax benefits that a corporation could purchase from another corporation.) You do not have to compute the limit because the acquiring firm is not our client. Instead, describe any limit in words based on your understanding of the rules relating to the limit.
Notes: if your team has only 3 members, delete research item d above. In addition, use the FILAC format for these individual issue writeups and include full and complete citations to relevant primary authority in each memo.
- As a team, compute the tax consequences for SPI and its shareholders. For each of these affected parties, these consequences include:
- Gain or loss for each party;
- Each party’s adjusted basis in each asset obtained;
- Each party’s “date basis” (holding period start date) for each asset obtained; and
- Any carryovers or other tax consequences that could affect future tax years.
Write results of your research for required item 2 above in a research memo to the files. For part 2, you may depart from our FILAC formatting for this case because there are several interrelated issues. You may, if you choose, format your writeup by party (SPI and each shareholder) as I have laid out the requirements above. Also, include your research memos from item 1 a-d above as support for your conclusions in part 2.
Andy would also like your team to quantify the tax savings for this transaction when compared to a fully taxable acquisition. That is, compute the gain or loss to Stromlie and its shareholders if Weedle had paid for the assets it acquired with no Weedle stock, which would result in a fully taxable acquisition.
For both parts of this assignment, you must support your computations with specific references to primary authority! For example, § 1001 dictates that taxpayers recognize realized gains and losses. So, if you conclude that some or all of a gain or loss deviates from this result, you must support your conclusion with IRC and regulation section references. If you do not, your conclusion is incorrect.
Financial Management for Decision Makers
ISBN: 978-0138011604
2nd Canadian edition
Authors: Peter Atrill, Paul Hurley