Reorganizations and Consolidated Tax Returns Accounting, Finance, SPSS

Reorganizations and Consolidated Tax Returns
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Reorganizations and Consolidated Tax Returns
Expanding a business usually entails significant changes in the manner in which the company is managed. Management requires dedicating more energy, time, and money to various operations, and reorganization plays a crucial role in helping a company to utilize its resources wisely. While many companies reorganize in an attempt to overcome financial predicaments, restructuring is not only for sinking businesses. The process can be undertaken by a company to cope with additional growth or a firm anticipating to acquire or merge with another company. Different types of reorganizations, including type A, B, C, and D in consolidations and mergers, are discussed in detail below.
1 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.
As far as consolidation is concerned, reorganization refers to the process by which a company acquires new entities in deals that involve nontaxable transactions. Laws governing the reorganization process are well stipulated in section 368 of the United States tax law codes. There are four different types of reorganization, which include type A, B, C, and D.
Type A reorganization is a type of acquisition where the acquirer does not inherit the liabilities of the acquired company immediately (Swartz, 2015). Normal mergers entail liabilities of acquired company being transferred to the acquirer, and in instances when the former has huge tax liabilities, the former is expected to clear them with the Internal Revenue Service (IRS). Type A reorganization allows corporations to avoid being taxed by deferring the taxable income to capital gains in the financial statements as stipulated in section 368 (Hoffer & Oesterle, 2013). Hence, a company is able to legally avoid tax when it uses type A reorganization. Apart from being exempted from the target company liabilities, acquirer enjoys the benefits of avoiding a tedious and complex process involving approval by shareholders of the target company, which saves a great deal of time and paperwork (Swartz, 2015). On the other hand, Type B reorganization entails the management taking advantage of the voting stock of acquiring company to obtain the stock of the target entity. In this form of arrangement, if the acquirer possesses over 80% of the target company’s stock, it obtains the power to convert this firm into its subsidiary (Swartz, 2015). Type B allows restriction of voting rights of the target company, giving acquirer the full control. Here, corporations benefit tax-wise as a result of deferring of the capital gains for taxation-related issues. Under the normal circumstances, acquiring another company involves taxable transactions, but type B reorganization exempts acquirer from paying tax. Type C reorganization refers to a phenomenon where the target entity is liquidated, and acquirer’s shareholders purchase its shares (Swartz, 2015). Thus, the assets of the company being acquired are possessed by the acquirer, but the stock still belongs to the former shareholders of the acquired entity. Type C organization gives acquiring entity an opportunity to choose liabilities of the target company that it desires to acquire and ignore others (Swartz, 2015). Therefore, the acquirer is in a position to acquire assets in proportions. In terms of tax, if the value of assets belonging to the company being acquired is recognized in the market and the company complies with the provisions of section 368, then it is exempted from the tax. Type D organization involves a complete transfer of assets of the target entity to the acquirer (Swartz, 2015). However, unlike other forms of reorganization, the transferor corporation or its shareholders are in full control of the company to which the assets have been transferred. According to section 368, there are two categories of type D reorganization, which include acquisive and divisive (Hoffer & Oesterle, 2013). In the divisive arrangement, for the transferor to obtain full control of the new entity, it must own up to 80% of the total voting stock and up to 80% of total shares (Swartz, 2015). The benefit of type D reorganization is that it is possible for the new corporation to split into new entities while at the same time keeping the former company in charge of all operations if it has 80% of total shares (Swartz, 2015). Since the new corporation is divided, no tax liabilities arise from this type of reorganization. From the personal and professional point of view, the current client should adopt type B reorganization because the deal does not involve cash, which will eliminate the likelihood of paying tax. After the reorganization process, despite the transferor becoming the acquirer’s subsidiary, it is considered an independent entity under type B reorganization and will be charged independently for its taxes (Swartz, 2015). The acquiring company also has the power to withhold shares of transferor even when the shareholders of the acquired company want them.
2 Suggest the type of reorganization the client should use for the ABC Corporation based on your research. Justify the response.
ABC Corporation is currently operating at a loss and is bound to be acquired through a reorganization arrangement involving nontaxable transactions (Swartz, 2015). The client should capitalize on the losses being experienced by the target company. The best reorganization type that my client can use in this scenario is type A because after the entire process is complete, the acquiring entity owns all liabilities and assets of the target company and the existence of the target corporation ceases (Swartz, 2015). These assets and liabilities can be included in the financial statement of the acquiring corporation and loss can be used to set off taxes because Income Tax Law indicates that the income of a company operating at a loss should not be taxed.
3 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.
The organization should adopt step-up method in its acquisition deals if it anticipates using taxable acquisition structure (Dickinson, Wangerin & Wild, 2016). While the organization will be expected to pay some form of tax using this method, the strategy will provide assets with high market value to the acquirer. The target company is expected to transfer the title of its individual net assets at their fair market values. As a result, acquirer inhe...