Reorganizations and Consolidated Tax Returns
Assignment 3: Reorganizations and Consolidated Tax Returns
Suppose you are a CPA, and you have a corporate client that has been operating for several years. The company is considering expansion through reorganizations. The company currently has two (2) subsidiaries acquired through Type B reorganizations. The client has asked you for tax advice on the benefit of a Type A, C, or D reorganization over a Type B reorganization. Additional facts regarding the issues are reflected below.
The company currently files a consolidated income tax return with the two (2) subsidiaries acquired through a Type B reorganization.
ABC Corporation, a subsidiary targeted by the client for takeover, has substantial net operating losses.
XYZ Corporation and BB Corporation will be acquired as subsidiaries in the next six (6) months.
Use the Internet and Strayer databases to research the rules and income tax laws regarding Types A, B, C, and D reorganizations and consolidated tax returns. Be sure to use the six (6) step tax research process in Chapter 1 and demonstrated in Appendix A of your textbook as a guide for your written response.
Write a four to six (4-6) page paper in which you:
Compare the long-term tax benefits and advantages of each type of reorganization, and recommend the type of reorganization that will be most beneficial to the client.
Suggest the type of reorganization the client should use for the ABC Corporation based on your research. Justify the response.
Propose a taxable acquisition structure for the client’s planned acquisitions over a nontaxable reorganization. Assess the value of a taxable transaction over a nontaxable reorganization for the client.
Examine the value and limitations of including the ABC Corporation if acquired as a wholly owned subsidiary in the consolidated return, and provide a recommendation to your client. Support the recommendation with applicable research.
Create a scenario that will allow the client to reduce any disadvantages from filing a consolidated return as a member of a controlled group.
Use the six (6) step tax research process, located in Chapter 1 and demonstrated in Appendix A of the textbook, to record your research for communications to the client.
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Reorganizations and Consolidated Tax Returns
Reorganization and acquisitions
Type A Reorganization
The Type A transaction, unlike a Type B reorganization, allows the buyer to utilize either nonvoting or voting stock. Type A reorganization also allows the buyer to utilize more cash in the total consideration given that the full sum of money which can be utilized has not be specified by the law. Type A reorganization is very flexible in comparison to a Type B transaction given that it allows for a combination of different payment types. Moreover, Type A reorganization allows the selling shareholders to reschedule the recognition of income taxes related to those shares exchanged for the acquirer stock.
Type B Reorganization
This type of reorganization is most important when the seller needs to continue operating the business of the seller and its contracts. Nonetheless, it compels the seller to accept almost all acquirer stocks in payment for that particular acquisition. In Type B reorganization, the Target exchanges its stock for the Purchaser’s stock – it has to be voting stock.
Type C Reorganization
This is understood as an acquisition of a Target’s liabilities and assets in exchange for shares of the Buyer. The main advantages of a Type C reorganization are as follows: procedures are simple; up to 20 percent of the deal, consideration can be cash or other assets; and the Buyer may record acquired assets at market value and in so doing steps up the basis of acquired assets. In this type of reorganization, the Buyer acquires substantially all of the Target’s assets, meaning 70 percent of the Target’s gross assets or 90 percent of the Target’s net assets. In contrast to a Type B reorganization, cash or other assets in a Type C reorganization can be used as consideration. Nonetheless, no less than 80 percent of the deal value has to be paid for using the Buyer’s voting shares. The fraction of the consideration that is paid in whichever form besides buyer voting stock is taxable to the seller.
Type D Reorganization
There are 2 sorts of Type D reorganizations – one covers restructuring while the other one covers acquisitions. In the acquisition Type D reorganization, the acquiring corporation will receive 80 percent of the stock in the Target in exchange for voting stock in the acquiring corporation. In essence, the shareholders in the acquiring firm will become controlling shareholders in the Target. The divisive Type D reorganizations encompass splitoffs, split-ups, and spinoffs. The advantage of a Type D reorganization is that the company can be divided without tax consequences to the shareholders.
Considering that the company seeks to acquire BB Corporation and XYZ Corporation as subsidiaries within the coming 6 months, the type of reorganization that will be most beneficial to the client is Type C reorganization. As a Stock-for-Assets acquisition in a Type C reorganization, the company – which is the acquirer – will exchange its voting common and/or preferred stock for substantially all of the assets of the Target. Corporations BB and XYZ – the targets – will liquidate and transfer the acquirer shares as well as any remaining assets to its shareholders.
Recommended type of reorganization
The best type of reorganization in this situation that the client needs to use for the ABC Corporation is Typ...