Asset v.

Stock
An asset acquisition is treated an acquisition of the assets
A stock purchase is treated as a purchase of the equity of
Buyers prefer asset deals and sellers prefer stock deals
Tax-Free v. Taxable
Tax-free means a transaction qualifying for tax deferral tre
Taxable means the transaction gives rise to an immediatel
The amount of equity provided as consideration in the transa

Asset
Tax-Free A Merger - 368(a)(1)(A):
Q:
(i) Statutory merger (satisfies the merger laws of T's state of incorporation)
(ii) COSI - T's SHs must exchange at least 40% value of total outstanding T stock fo
- Treas. Reg. 1.368-1T(e)(2)(v)

NQ:
(i) Cash consideration + liab assumed > 60% of consideration provided by acquirer,
(ii) Liab assumed < total T liab, OR
(iii) Target does not cease to exist by operation of state law

Note: No solely for stock rule, no substantially all assets rule, voting stock is n
exchanged

Forward Triangular Merger - 368(a)(2)(D):

Q:
(i) Sub must be first-tier sub of P (at least 80% of vote and value of stock owne
(ii) Sub must acquire "substantially all" of T's Assets
- FMV of assets acquired >: 90% of T net assets @ FV less T liab and 70% of T gro
(iii) Only P stock can be provided to T's S/Hs,
(iv) COSI - boot can be used but limted to COSI test

NQ: Sub stock is provided; merger of T into P (qualifies as Type A); consolidation (mu
 C Reorganization - 368(a)(1)(C): P acquires Ts assets solely in exchange for P s
Q:
(i) P must acquire "substantially all" of T's Assets (FMV of assets acquired >: 90%
and 70% of T gross assets @ FV) - Rev. Proc. 77-37
(ii) Solely in exchange for P voting stock (only consideration provided but see bo
- Boot Relax: Aggregate amount of boot < 20% of total value of consideration p
> i.e., at least 80% of FMV of T's property must be acquired w/ voting stock -
> if boot ($ or other prop) is provided as consideration, then liabilities assume
determine whether the 80% test is met (Treas. Reg. 1.368-2(d)(3)).
-->i.e., aggregate boot ($, other prop, assumed liab) must be < 20% of
- Voting stock of either the acquiring company or its parent may be used as con
Reg 1.368-2(d)(1)).
(iii) T must liquidate (distribute P voting stock & other prop), waived if T's SHs trea
50)
- 368(a)(2)(G) requires T to distribute all its assets (including the shares of P) in l

NQ:
(i) FMV of assets acquired <: 90% of T net assets @ FV less T liab OR 70% of T gross
(ii) Cash consideration is used and liab assumed > 20% of FV of target assets acq
(iii) Target does not cease to exist by operation of state law and is not liquidated

Acquisition Tax Consequences:

Tax

Corporate level tax consequence (i.e., double layer of tax on ass

Taxable Asset sale), which generates current E&P

> No corporate level tax on receipt of P stock and no gain on

distribution of P stock to its SHs
- Even if T receives boot in addition to P stock, so long as:
(i) Such boot did not disqualify the reorganization, and
Tax-free Asset
Target (ii) T distributes the boot to its S/Hs in pursuance of the plan
reorganization
> Double taxation if transaction fails to qualify as a reorg and is
treated as a taxable asset acq.
 Target

Taxable Stock No gain or loss on the sale of its stock at corp. level

Tax-free Stock No corp-level tax consequences (not a party to reorg)

> Asset Sale:

- Nonliquidating distribution - Dividend treatment under 301/30
(div if E&P, tax free ROC, taxable gain)
Taxable Asset - Liquidating distribution - Sale treatment under 1001, no div (n
E&P). Gain in amt > adj. tax basis in T stock
> Merger: Sale treatment under 1001. Gain to extent amt rec'g
SHs adj tax basis in T stock

> Tax-free to extent SH receives stock

> Taxable to extent of boot
- Boot treated as 1001 sale or exchange (i.e., basis offset); capi
Tax-free Asset gain
- Including NQ P/S and long-term debt securities received in exce
T's SH of those surrendered

> LTCG on sale of T stock (stock sale proceeds less basis in T's sto
Taxable Stock
> If stock seller is a corp - 2 levels of tax (@ corp and SH level)

> Tax-free to extent SHs receive P stock

Tax-free Stock > Taxable to the extent of boot
- Boot treated as 1001 sale or exchange, capital gain

Taxable Asset Creates tax goodwill, amortized over 15 years

Purchaser
 > Assumption of T's corp-level tax to extent transaction fails to qu
Tax-free Asset
Purchaser as reorg and is treated as taxable asset acq

Taxable Stock No gain or loss

Tax-free Stock

Tax Consequences
Corporate level tax consequence (i.e., double layer of tax on ass
sale), which generates current E&P
Target

> Asset Sale:

- Nonliquidating distribution - Dividend treatment under sec.
301/302, (div if E&P, tax free ROC, taxable gain)
Taxable Asset T's S/Hs - Liquidating distribution - Sale treatment under sec. 1001, no di
(no E&P). Gain in amt > adj. tax basis in T stock
> Merger: Sale treatment under sec. 1001. Gain to extent amt re
> SHs adj tax basis in T stock

Purchaser Creates tax goodwill, amortized over 15 years

> No corporate level tax on receipt of P stock and no gain on

distribution of P stock to its SHs
- Even if T receives boot in addition to P stock, so long as:
(i) Such boot did not disqualify the reorganization, and
Target
(ii) T distributes the boot to its S/Hs in pursuance of the plan
reorganization
> Double taxation if transaction fails to qualify as a reorg and
treated as a taxable asset acq.

Tax-free Asset
 > Tax-free to extent SH receives stock
> Taxable to extent of boot
- Boot treated as 1001 sale or exchange (i.e., basis offset); capi
Tax-free Asset T's S/Hs gain
- Including NQ P/S and long-term debt securities received in exce
of those surrendered

> No gain/loss recognized on Ps receipt of T stock or assets in

exchange for P stock
- If P transfers property other than its own stock/securities to T (
Purchaser T's S/Hs), P recognizes gain/loss equal to the diff. of the property's
over/under its adj. tax basis
> Assumption of T's corp-level tax to extent transaction fails to qu
as reorg and is treated as taxable asset acq

Target No gain or loss on the sale of its stock at corp. level

> LTCG on sale of T stock (stock sale proceeds less basis in T's sto
Taxable Stock T's S/Hs
> If stock seller is a corp - 2 levels of tax (@ corp and SH level)

Purchaser No gain or loss

Target No corp-level tax consequences (not a party to reorg)

> Tax-free to extent SHs receive P stock

T's S/Hs > Taxable to the extent of boot
Tax-free Stock - Boot treated as 1001 sale or exchange, capital gain

Purchaser
sition is treated an acquisition of the assets within the entity (double taxation, potentially)
se is treated as a purchase of the equity of the entity (single taxation at S/H level)
et deals and sellers prefer stock deals

a transaction qualifying for tax deferral treatment under Sections 368 (reorganization), 355 (spin-off / distribu
the transaction gives rise to an immediately taxable event with no element of tax deferral
quity provided as consideration in the transaction is a critical distinction

Asset
B Reorganization - 368:
Q:
ger laws of T's state of incorporation) (i) Must be solely for P voting s
t 40% value of total outstanding T stock for P stock (ii) P must have control of T stoc

NQ:
(i) Cash consideration used, OR
60% of consideration provided by acquirer, OR (ii) <80% target stock is acquired
(iii) T is liquidated after acquisiti
eration of state law

bstantially all assets rule, voting stock is not required, and boot may be

2)(D): Reverse Triangular Merger - 3

Q:
ast 80% of vote and value of stock owned), (i) Must be solely for P voting sto
of T's Assets - Boot Relax: Aggregate amoun
et assets @ FV less T liab and 70% of T gross assets @ FV (ii) T's S/Hs surrender control o
s S/Hs, and non voting stock)
o COSI test (iii) Sub must acquire "substanti
- FMV of assets acquired >: 90%
to P (qualifies as Type A); consolidation (must be a merger) Notes: i. Acquiring Subs assets a
ii. Post acquisition drop do
iii. Treatment of Acquiring
iv. Ts distribution of asse
(iv) Sub must be first-tier sub of
cquires Ts assets solely in exchange for P stock

T's Assets (FMV of assets acquired >: 90% of T net assets @ FV less T liab
roc. 77-37
ock (only consideration provided but see boot relaxation)
oot < 20% of total value of consideration provided
operty must be acquired w/ voting stock - 368(a)(2)(B)
ed as consideration, then liabilities assumed are added to the boot to
Treas. Reg. 1.368-2(d)(3)).
her prop, assumed liab) must be < 20% of total value of consideration
company or its parent may be used as consideration, but not both (Treas

stock & other prop), waived if T's SHs treat T as liquidating (Rev. Proc. 89-

all its assets (including the shares of P) in liquidation.

t assets @ FV less T liab OR 70% of T gross assets @ FV

assumed > 20% of FV of target assets acquired;
eration of state law and is not liquidated

Tax Basis

nsequence (i.e., double layer of tax on asset

current E&P

x on receipt of P stock and no gain on

o its SHs
oot in addition to P stock, so long as: Substituted basis in the P stock received
not disqualify the reorganization, and equal to its basis in the assets transferred
e boot to its S/Hs in pursuance of the plan of to P

ansaction fails to qualify as a reorg and is

set acq.
sale of its stock at corp. level Carryover basis in assets

Carryover basis of assets

equences (not a party to reorg) Tacking of holding period for assets
Remain unchanged

ibution - Dividend treatment under 301/302,

C, taxable gain)
tion - Sale treatment under 1001, no div (no 358
j. tax basis in T stock
ment under 1001. Gain to extent amt rec'g >
tock

receives stock
Substituted basis in stock received = SH's
boot
basis in T stock surrendered, increased by
01 sale or exchange (i.e., basis offset); capital
gain recognized, reduced by boot received
d long-term debt securities received in excess
Tacking of holding period in P stock
received (1223(1))

ck (stock sale proceeds less basis in T's stock)

rp - 2 levels of tax (@ corp and SH level)

s receive P stock
t of boot Substituted basis in stock received
01 sale or exchange, capital gain

Cost basis (i.e., step up basis) in T's assets

mortized over 15 years Fresh start holding period in assets
received
 Carryover basis (362(b)) of assets
rp-level tax to extent transaction fails to qualify
Tacking of holding period in assets received
as taxable asset acq
(1223(2))

Cost basis (or FMV?) of T stock purchased

Substituted basis in T stock

Tax Consequences Basis

nsequence (i.e., double layer of tax on asset
current E&P

ibution - Dividend treatment under sec.

x free ROC, taxable gain)
tion - Sale treatment under sec. 1001, no div 358
> adj. tax basis in T stock
ment under sec. 1001. Gain to extent amt rec'g
T stock

Cost basis (i.e., step up basis) in T's assets

mortized over 15 years Fresh start holding period in assets
received

tax on receipt of P stock and no gain on

o its SHs
oot in addition to P stock, so long as: Substituted basis in the P stock received
not disqualify the reorganization, and equal to its basis in the assets transferred
e boot to its S/Hs in pursuance of the plan of to P

transaction fails to qualify as a reorg and is

set acq.
 receives stock
Substituted basis in stock received = SH's
boot
basis in T stock surrendered, increased by
01 sale or exchange (i.e., basis offset); capital
gain recognized, reduced by boot received
d long-term debt securities received in excess
Tacking of holding period in P stock
received (1223(1))

zed on Ps receipt of T stock or assets in

ty other than its own stock/securities to T (or Carryover basis (362(b)) of assets
gain/loss equal to the diff. of the property's FV Tacking of holding period in assets received
basis (1223(2))
rp-level tax to extent transaction fails to qualify
as taxable asset acq

sale of its stock at corp. level Carryover basis in assets

ck (stock sale proceeds less basis in T's stock)

rp - 2 levels of tax (@ corp and SH level)

Cost basis (or FMV?) of T stock purchased

Carryover basis of assets

equences (not a party to reorg) Tacking of holding period for assets
Remain unchanged

s receive P stock
t of boot Substituted basis in stock received
01 sale or exchange, capital gain

Substituted basis in T stock

 tion), 355 (spin-off / distribution), 332 (liquidation), or the like

Stock
organization - 368:

ust be solely for P voting stock (pref. & common voting stock)
must have control of T stock after reorg (at least 80% of: voting and non voting stock) - 368(c)

sh consideration used, OR
80% target stock is acquired, OR
is liquidated after acquisition

rse Triangular Merger - 368(a)(2)(E):

ust be solely for P voting stock (pref. & common voting stock)
Boot Relax: Aggregate amount of boot < 20% of total value of consideration provided
s S/Hs surrender control of T stock - P must have control of T stock after reorg (at least 80% of: voting
on voting stock)
ub must acquire "substantially all" of T's Assets
MV of assets acquired >: 90% of T net assets @ FV less T liab and 70% of T gross assets @ FV
s: i. Acquiring Subs assets are considered
ii. Post acquisition drop down of Target stock or assets permitted
iii. Treatment of Acquiring Parent contributions to Acquiring Sub
iv. Ts distribution of assets to its shareholders counts against meeting the substantially all test.
ub must be first-tier sub of P (at least 80% of vote and value of stock owned in the reorg exchange)
if not enough stock transferred, wont meet COI

Attributes

Remain (asset sale) or terminate (merger)

Preserved and carryover but abiity to use NOL
may be limited by 269, 382, and 383 due to
the change in ownership

> Tax attributes remain in tact (no need for

sec. 381)
> Continuation and assumption of T's E&P
> Assumes historic tax and non-tax liabilities

T's attributes do not transfer (e.g., NOLs)

> Carryover of 381 but subject to 382
limitations
> Continuation and assumption of T's E&P
> Assumption of T's historic tax and non-tax
liab.

Tax Attributes

Remain with T (asset sale) or terminate

(merger)

T's attributes do not transfer or survive (e.g.,

NOLs)
> Carryover of 381 but subject to 382
limitations
> Continuation and assumption of T's E&P
> Assumption of T's historic tax and non-tax
liab.
> P suceeds to T's tax attributes

Preserved and carryover but abiity to use NOL

may be limited by 269, 382, and 383 due to
the change in ownership

> Carryover of tax attributes but subject to

limitation
> Continuation and assumption of T's E&P
> Assumes historic tax and non-tax liabilities
on), or the like

Stock

on voting stock)
t 80% of: voting and non voting stock) - 368(c)

on voting stock)
otal value of consideration provided
have control of T stock after reorg (at least 80% of: voting

s
V less T liab and 70% of T gross assets @ FV

or assets permitted
s to Acquiring Sub
s counts against meeting the substantially all test.
vote and value of stock owned in the reorg exchange)
 Code Sections

1001/361 - gain equal to the difference b/w

amount realized for the prop. and the propertys
adjusted basis. Treated as if prop. had been sold to
distributee at FMV.
356/357 - gain is recognized on the lesser of
appreciation or boot

361(a) - no gain or loss is recognized to a corp if

party to a reorg or exchanges of property, solely
for stock or securities in another corp party to the
reorg
361(b) - boot
358 - basis
381 - carryover of tax attributes

361 - no gain or loss to the acquired corp.

381 - carryover of tax attributes

356 & 1001

358(a)/362(b) - substitute tax basis rules

1223(2) - holding period
356/357 - treatment of boot received and liab.
assumed in the transactions.
354(a) - no gain or loss shall be recognized if
stock or securities in a corp party to a reorg are
exchanged solely for stock or securities in such
corp

354 - No gain or loss is to be recognized upon an

exchange of shares by SHs who are parties to a
reorg
356/357 - Treatment of boot received and liab.
assumed in the transactions.
358/362(b) - substitute tax basis rules

1001 - Gain equal to FMV of property exchanged

less basis in prop exchanged
362(b) - carryover basis
1223(2) - holding period
381 - carryover of tax attributes
1032(a) - no gain or loss shall be recognized to a
corp on the receipt of money or other property in
exchange for stock (including treas stock) of such
corp.

1032(a) - no gain or loss shall be recognized to a

corp on the receipt of money or other property in
exchange for stock (including treas stock) of such
corp.
358/362(b) - substitute tax basis rules

Entity Consequences

T stays intact (asset sale) or terminates (merger)

> Reasons to keep T alive: Elderly SHs and SUB
T remains in existence as P's sub
362(b), the basis is the same as it would be in the hands of the transferor,
increased in the amount of gain recognized to the transferor.

Code Sections
1001/361 - gain equal to the difference b/w amount realized for the prop. and
the propertys adjusted basis. Treated as if prop. had been sold to distributee at
FMV.
356/357 - gain is recognized on the lesser of appreciation or boot

356 & 1001

1001 - Gain equal to FMV of property exchanged less basis in prop exchanged

361(a) - no gain or loss is recognized to a corp if party to a reorg or exchanges of

property, solely for stock or securities in another corp party to the reorg
361(b) - boot
358 - basis
358(a) - substitute tax basis rules
1223(2) - holding period
356/357 - treatment of boot received and liab. assumed in the transactions.
354(a) - no gain or loss shall be recognized if stock or securities in a corp party
to a reorg are exchanged solely for stock or securities in such corp

362(b) - carryover basis

1223(2) - holding period
381 - carryover of tax attributes
1032(a) - no gain or loss shall be recognized to a corp on the receipt of money or
other property in exchange for stock (including treas stock) of such corp.
1001 - Gain equal to FMV of property exchanged less basis in other property
exchanged

381 - carryover of tax attributes

1032(a) - no gain or loss shall be recognized to a corp on the receipt of money or

other property in exchange for stock (including treas stock) of such corp.

361(a) - no gain or loss to the acquired corp.for exchanges of property, solely for
stock
361(b) - boot
358 - basis
381 - carryover of tax attributes

354 - No gain or loss is to be recognized upon an exchange of shares by SHs

who are parties to a reorg
356/357 - Treatment of boot received and liab. assumed in the transactions.
358/362(b) - substitute tax basis rules
1223 - holding period

1032(a) - no gain or loss shall be recognized to a corp on the receipt of money or

other property in exchange for stock (including treas stock) of such corp.
1001 - Gain equal to FMV of property exchanged less basis in other property
exchanged
358/362(b) - substitute tax basis rules
1223(2) - holding period
501.7.2Alternative Acquisition Structures

501.7.2.1Summary
Newco purchases Target's stock with no Code 338(h)(10) or 336(e) electionasset COB. 72

Newco purchases assets from Target or Bigcoasset SUB.

Newco purchases Target's stock with Code 338(h)(10) or 336(e) electionasset SUB.

Forward cash merger of Target into Newco or Newco's subsidiary NewSubasset SUB, like purchas

Reverse cash merger of Newco's transitory subsidiary NewSub into Targetasset SUB if Code 338

Reverse cash merger of Newco into Targetasset COB, like purchase of Target's stock, and asset S
ionasset COB. 72

asset SUB.

asset SUB, like purchase of assets.

asset SUB if Code 338(h)(10) or 336(e) election and asset COB if no Code 338(h)(10) or 336(e) election, li

rget's stock, and asset SUB if Code 336(e) election, but Code 338(h)(10) election not permitted because no o
10) or 336(e) election, like purchase of Target's stock.

permitted because no one corporate entity purchases at least an 80-80 amount of Target's stock (unless Newco
get's stock (unless Newco is itself an 80-80 subsidiary of another corporation).
Acquisition of Target Assets

Step 1: Step 2:
FV of T Assets Acquired T liabilities assumes

Cash Acct. Payable

Inventory Notes Payable
Equipment Total -
Land
Total -

Acquisition of Target Stock

%
% of target stock
acquired FV of consderation provided by acquirer (P):

Yes/No Cash
Is the target Acquirer (P) stock
liquidated?
Total 0
 Step 3: Step 4:
Net Assets Acquired FV of consideration provided by acquirer (P)

Net Assets Cash

Acquirer (P) Stock
Total -

Qualifications:
Yes/No
A Reorganization

B Reorganization
by acquirer (P):
C Reorganization

A Effects:
Target :
Target Realized Gain 0
Target Recognized Gain 0

Acquirer basis in T noncash property equals the basis in the targe

Inventory
Equipment
Land

Acquirer holding period for noncash property includes the target h

123500
35000
181000
107500
19000
 Step 5:

Yes/No
1) Does the target cease to exist by operation of state law?

2) If no, is the target liquidated?

Target SH:
Amount realized:
Cash distributed 0
Acquirer (P) stock distributed 0
e basis in the target hands Total 0

Target SH stock basis Equals basis of target

Realized Gain 0

ncludes the target holding period

Target SH recognized gain:
Lesser of:
Realized gain
Cash distributed
*character based on sec. 302(b)

Target SH basis in acquirer stock:

Target SH stock basis
Plus: Recognized gain
Less: Basis allocated to cash
quals basis of target net assets