Asset Sale

1
Asset Sale
Cash, notes
Old Corp
Buyer
Business Assets
Stock cancelled In liquidation
Impacts 1. Double tax corp and
shareholder level. 2. Asset basis step-up 3.
Price allocation to assets 197 and 1060
4. Pass-thru installment sales to
shareholders, not corp
Cash, Notes
Old Corp Stockholders
2
Purchase Price Allocations 197, 1060
197 Anti Soft Dollar Rule All intangible
assets amortized over 15 years information
bases, customer lists, patient files, know-how,
licenses, franchises, trade names, goodwill,
going-concern value, covenants not to compete.
1060 Priority Asset Allocation Rules
Priority One Cash or cash equivalents.
Priority Two Highly-liquid securities, foreign
currencies and CDs. Priority Three ARs,
mortgages, credit card receivables.
Priority Four Inventory and dealer property
Priority Five Other tangible assets
(equipment, real estate, etc.) Priority
Six Intangibles except goodwill and going
concern value. Priority Seven Goodwill
and going concern value. Note Parties can agree
on values per agreement, but not change
priorities.
3
Stock Sale
Old Corp
Buyer
338 Election?
Cash, notes
Impacts 1. Shareholder level tax. 2. No
asset basis step-up w/o 338 3. 338 gives
step-up at huge cost 4. If 338, same allocation
issues as asset sale 5. Installment
reporting OK at shareholder level.
Stock
Old Corp Stockholders
4
338 Election
Concept Buyer of 80 of more of stock of
target corporation over 12 month period can elect
to treat as asset purchase. Basis step-up, all
new corp attributes, and now corporate level
tax. Killer Demise of general utility
doctrine gutted any value of 338 election in most
cases. Why take tax hit now to get future
benefit of basis step-up? Two Survivors 338
still works where - Corp has big NOL can
than shelter corporate level tax triggered on
deemed asset sale. - Stock of sub is sold
an gain on sub stock is less than gain on sub
assets. Then, 338(h)(10) election, coupled with
332 and 337, may produce win-win step-up with
lower tax to parent corp than sold sub stock.
Bottom Line Demise of General Utilities
triggers double tax on nearly all asset sales and
stock sales with 338 election. Hence, structure
of choice now in most cases is straight stock
sale with no 338 election.
5
Problem 679
T Corp balance sheet is a C Corp.
A.B. FMV Cash
200k 200k
Liabilities 300k
Inventory 50k 100k
Equip 100k 200k
A Stock (50k basis) 500k
Building 50k 300k
B Stock (40k basis) 400k
Securities 400k 300k
C Stock (140k basis) 100k Goodwill
0 200k
Total
800k 1,300k
1,300k (a) T
liquidates, all assets to shareholders pro rata,
followed by asset sale to P. T Corp ordinary
income 150k (inventory 50k and equip 1245 of
100k) and LTCG of 350k (250k building, 200k
goodwill less 100k securities). Tax to corp 175k
(35 of 500k). Balance of 1,125k assets less
300k liabilities (net 825k) to shareholders, who
would have collective gain LTCG of 825k less 230k
basis. For A, gain would be 362.5k (412.5k less
50k basis), which at 20 triggers tax of 72.5k.

6
Problem 679

• (b) T adopts liquidation plan, sells all assets
  (subject to debt) to P for 1 mill cash and then
  liquidates. Results same as in (a) at both
  corporate and shareholder level.
• (c) Same as (b) but P pays 400k cash and gives
  600k note, market rate payable annually,
  principal due in 5 yrs. Cash and note
  distributed to shareholders. T Corp recognizes
  all 500k gain now because distributes note to
  shareholder thus no 453 available to T Corp. C
  has loss, so not concerned with 453. A B may
  each use 453 treatment on full note, even
  inventory portion because part of bulk sale.
  453(h)(1)(B).
• (d) T sells all assets to P as in (b) - 1 mill
  cash but does not liquidate and instead invests
  in stock portfolio. T still have 500k taxable
  gain and 175k tax. E P increased by 325k
  (excess of 500k gain over 175k tax) to 725k. T
  would become personal holding company, subject to
  penalty tax if not distribute investment
  earnings. Only possible justification is desired
  1014 stock basis step-up on death of shareholder
  to eliminate 331 gain on future liquidation.

7
Problem 679
(e) P purchases T stock from shareholders for
800k (800 per share) and makes 338 election.
- Shareholder capital gain based on 800k
paid 400k to A (50k LTCG) 320k to B (280k
LTCG) 80k to C (60k LTCL). - Since
qualified stock purchase under 338 (one-shot
100 stock purchase), 338 election is deemed sale
of assets from T to P. Formula for amount of
purchase (aggregate deemed sales price or ADSP)
is ADSP Grossed up stock price T
liabilities tax rate x (ADSP Ts tax basis
in deemed assets sold) ADSP 800k
300k .35 (ADSP 800k) ADSP
1,261,538. (Roughly 800k for stock, 300k
liabilities and 175k tax burden in (a)). - T
must report gain on deemed asset sale on final
return and pay tax. ADSP allocated to assets in
new corp first to non-goodwill up to FMV and
balance to goodwill. P reduces price because it
bears tax hit on deemed sale.

8
Problem 679
(f) P purchases T stock for cash, no 338
election. How much to pay? Price will be
discounted for present value of lost tax benefits
due to low basis carryover. Negotiated somewhere
between 1 mill and 800k. (g) If P and T
indifferent, which best Straight asset purchase?
Stock with 338 election? Stock without 338
election? Best deal stock without 338 election
because no corporate level tax now. Non-tax
factors may be big deal. (h) What impact is
600k NOL in T? NOL could shelter corporate tax
on sale of assets or 338 election. Thus, step-up
basis possible with no corporate level tax now.
Good use of NOLs because may be otherwise limited
due to 382 limitations on carryover of NOLs with
change of ownership. (i) T wholly-owned sub of
S Inc., which has 200k basis in T stock. All T
assets (subject to debt) distributed to S, who
sells to P. Liquidation tax free to T and S
under 332 and 337. S takes T basis in assets per
334(b) and potential gain on T stock held by S is
eliminated. On sale of assets, S picks up 500k
income (15o ordinary and 350 capital). P takes
new 1012 cost basis. Identical result if T first
sold assets, then liquidated.
9
Problem 679
(j) Same as (i) but P insists transaction be
structured as acquisition of T stock from S Inc.
Per 338(h)(10), T and S (members of consolidated
group) may treat as sale of assets, not sale of
stock. This will always be advantage if gain on
asset sale less than stock sale, due to basis
differences or NOL. Result is P gets stepped-up
basis and T and S pay less tax. Lesson 338
usually only works where big NOL or parent-sub
situation exists and gain in sub assets less than
gain in sub stock held by parent.
10
Tax Impacts Individual
- Amount of income, gain, loss, deduction -
Loss limitations - Character of gain or loss
ordinary income or capital - Timing now or
deferred - Basis of any assets received -
Character of asset received inventory, capital,
1231 - Impact on basis of entity ownership
interests (corporate stock, partnership
interest)
11
Tax Impacts C Corporation
- Amount of income, gain, loss, deduction -
Loss limitations - Character of gain or loss
ordinary income or capital - Timing now or
deferred - Basis of any assets received -
Character of asset received inventory, capital,
1231 - Impact on E P. - Impact on basis
of corporate assets.
12
Tax Impacts S Corporation
- Amount of income, gain, loss, deduction and
tax effects - Loss limitations - Character
of gain or loss ordinary income or capital -
Timing now or deferred - Basis of any assets
received - Character of asset received
inventory, capital, 1231 - Impact on
accumulated adjustment account (AAA) and any C
period E P. - Impact on basis of corporate
assets.
13
Tax Impacts Partnership
- Amount of income, gain, loss, deduction and
tax effects - Loss and allocation limitations
- Character of gain or loss ordinary income or
capital - Timing now or deferred - Basis
of any assets received - Character of asset
received inventory, capital, 1231 - Impact on
inside capital accounts and outside basis of
partners - Impact on basis of partnership
assets.