This week’s study question from the Solomon Online Exam Simulator question database is now available.
Question (Relevant to the Series 79):
Both Buyer and Target are C corporations. From a taxation point of view, which kind of acquisition structure is generally the most beneficial to the Target’s shareholders?
Answers:
A. The Target’s assets are purchased by the Buyer
B. The Target’s stock is purchased by the Buyer with the Buyer’s stock
C. The Target’s stock is purchased by the Buyer through a 338(h)(10) election
D. The Target’s stock is purchased by the Buyer with cash
Correct Answer: B. The Target’s stock is purchased by the Buyer with the Buyer’s stock
Rationale: From a taxation perspective, an asset purchase is the worst situation for the Target’s shareholders because the shareholders are often subject to double taxation. In this case, the Target first pays a tax on the gain on the sale of its assets. Then if the proceeds are distributed to the Target’s shareholders through a dividend, the shareholders must pay a tax on the dividend. If the company is liquidated, the shareholders must pay taxes on the difference between the proceeds and their tax basis of their shares. The Buyer cannot choose a 338(h)(10) election because this is unavailable to acquirer’s of C corporations. If the Buyer buys the Target’s stock with cash and meets all the requirements of section 338, the Target’s shareholders will need to pay a tax on their gain. If the Buyer buys the Target’s stock with its own stock and meets all the requirements of section 338, the Target pays no corporate tax and the shareholders can defer taxation until they wish to sell the shares.
Weekly study questions are from Solomon’s industry-leading Online Exam Simulator.