REORGANIZATIONS AND CONSOLIDATED TAX RETURNS 8
Reorganizationsand Consolidated Tax Returns
Reorganizationsand Consolidated Tax Returns
Comparethe long term tax benefits and advantages of each type ofreorganization, and recommend the type of reorganization that will bemost beneficial to the client.
Determiningfacts is the first step to help the client select the best type ofreorganization that has the highest tax benefits. The facts of thiscase are the client is trying to expand the business throughreorganization. Already the business has two subsidiaries thus thereason it files consolidated tax. Consolidated tax is filed by abusiness on behalf of the subsidiaries for the parent company toreceive tax benefits. Additionally, the client parent company isplanning to acquire two other companies. The issue here is decidingthe better option for reorganization that will see the company evadetax, increase profit and improve efficiency. Comparing the fourtype’s reorganization helps to identify the reorganization typethat will bring in more advantages and tax benefits. Because theclient is the acquiring company the tax-free reorganizationconsequences are no loss or gain recognized unless the target companywill bear it. The property received retains it basis that it had withthe target company in addition to the gain recognized by SellerCompany. Therefore, it makes sense to recognize the reorganizationtype that is appropriate to this particular situation. This studypaper compares type A, B, C, and D reorganization to see which haslong term tax benefits.
TypeA reorganization is mostly for mergers and consolidation, for taxpurposes transaction under this type of reorganization is treated asa stock acquisition. The advantages of type A reorganization are theacquired can choose not to take all the seller company assets, allowthe use of cash. Another advantage is the buyer company can give thetarget shareholders non-voting stock that will not dilute theircontrol over parent company and the newly acquired (Gole, &Morris, 2007). The shortfalls are the acquiring company will have toaccept undisclosed liability. Another shortfall is that it requiresthe approval of the shareholders.
TypeC reorganization here the IRS requirement are the target companyshould liquidate. The target shareholders do become shareholders tooin the acquiring company. This reorganization provision states taxconsequences. The advantages are the acquired company does notinherit the undisclosed liabilities, and they can always purchasechosen assets. The cons are a tax is transferred, require the acquirecompany to use the voting stock, and require one to obtain consent tocontract assignment. All assets ought to be conveyed making ittechnically complicated compared to a merger.
TypeD reorganization is the divisive reorganization here the acquiringcompany is the one that transfers the assets while the target companyis the corporation that receive the property. This type ofreorganization does not require any compliance rule to free taxreorganization. What happens here is that the company divides intosmaller units and distributes stocks to shareholders.
TypeB reorganization is the reorganization that the client is currentlyusing. Type B reorganization is considerable as desirable tax-freereorganization transaction is treated for tax purposes as an assetacquisition. In tax consideration, this is a non-taxable transactionbecause acquirers’ stock is used in purchasing a huge percentage oftarget company assets or stocks (Block, 2004). The advantages of thistype of reorganization are it allows a phasing of the transactionsbecause the stock can be purchased for 12 months. Another advantageis the seller company can be merged into the parent company orretained as a subsidiary that operates independently. The shortfallsare it lacks the flexibility necessary in determining the purchaseprice composition. Another disadvantage is it can cause the combinedcompany earnings per share to be diluted.
Thetype of reorganization to go for should be tax-free reorganization orwith the lowest tax in this case neither the acquirer nor the sellercorporation recognizes loss or gain in the reorganization. The stockreceived by the seller company shareholder should not require them topay tax. When the target company is not subjected to tax on theirstock, then there will be no need to ask for a high price to offsetthe projected tax liability. Often, when a business fit in theprovision of free tax, transaction complexity increases. Thus, inmaking a decision on which type of reorganization is best for theclient a balance between tolerance for complexity and desire toreduce taxes must be reached. In this case, the client indicates thattax is more an issue to him than complexity thus my recommendationwould be Type B reorganization.
Toarrive at this decision consideration were made on the type ofcurrency offered to the target company in exchange for their assetsand stock. A transaction is treated or considered as tax-freereorganization when the target company maintains sufficient equitystake in the buyer company. Type B reorganization seemed the mostappropriate in this case. The equity stake is the continuity interest(Paulson & Huber, 2001). The revenue procedure 77-37 requiresthat during the exchange selling shareholders must part ways with 50%shares for acquired equity so that to meet the safe harbor of IRS(applicable authority).
Suggestthe type of reorganization the client should use for the ABCCorporation based on your research. Justify the response.
Thetype of reorganization that the client should use for the ABCCorporation based on the research conducted in this paper types Areorganization. This type of acquisition would, therefore, bereferred to as statutory merger whereby the two companies wouldcombine, but only the parent company would survive. In thistransaction there no requirement for voting stock which means that inacquiring ABC my client company could exchange the non-voting stockfor the selling company stock after all the merger would still befree. The exchange of non-voting stock, cash and properties wouldstill meet the continuity requirement by IRS. The continuity ofbusiness enterprise is a concept of the IRS acquisition structure itrequires the buyer company to continue the operation of the acquiredcompany or continue using a large portion of its assets in doingbusiness.
Proposea taxable acquisition structure for the client planned acquisitionsover a nontaxable reorganization. Assess the value of a taxabletransaction over a nontaxable reorganization for the client.
Thetaxable transaction structures proposal
Theclient, in this case, would have to pay for ABC, which are the targetcompany assets or stock using non-equity consideration, securities orcash (Block, 2004).
Herethe buyer pays for the target company stock or asset using its stock.The IRS requires the buyer to acquire enough stock from the targetcompany so to ensure the satisfaction of the continuity of interestprinciple.
Thevalue of a taxable transaction over a nontaxable reorganizationdepends on two things tolerance to complexity and desire to haveminimized tax. Complexity comes in when trying to fit business withinthe tax-free provision. Thus, if the client wants to avoidcomplexity, then he should go for a taxable transaction. But if hedoes not mind complexity then nontaxable reorganization is the bestoption.
Examinethe value and limitations of including the ABC Corporation ifacquired as a wholly owned subsidiary in the consolidated return, andprovide a recommendation to your client Support the recommendationwith applicable research.
Thefacts are ABC has been operating under loss the one thing that myclient should know is that when calculating for consolidated returnthe reports for income or loss of the subsidiary is filed or reportedon the consolidated return for the period it has been a member of thegroup. For the duration, it was a part of the group then it ought toreport separately by filling form 1120 of the company, states IFRS.Affiliated corporation groups are allowed by section 1501 to report aconsolidated income tax return. The values of doing this are theability to centralize planning, paying of tax and reporting (CCHIncorporated. 2008). The limitations are consolidation return onlyexist if the acquiring company meets the 80% rule.
Createa scenario that will allow the client to reduce any disadvantagesfrom filing a consolidated return as a member of a controlled group.Theclient can take advantage of the special tax sharing rule by filingseparate files from 1120 U.S corporation income tax returns.
Conclusionand recommendation, in the current business environment of mergersand acquisition being aware of basic tax considerations, isimportant. Hopefully, this study paper has used the six-step taxresearch to demonstrate which tax consideration the client should gofor. My recommendations for the client are to weigh all thereorganization before settling for one because each of them has aspecial trait that would suit different scenarios.
Block,C. D. (2004). Corporate taxation: Examples and explanations. NewYork, NY: Aspen Publishers. Retrieved from: (page 422)
CCHIncorporated. (2008). 2009 U.S. master tax guide. Chicago: CCH.
Gole,W. J., & Morris, J. M. (2007). Mergers and acquisitions: Businessstrategies for accountants. Hoboken, N.J: John Wiley & Sons.
Paulson,E., & Huber, C. (2001). The technology M & A guidebook. NewYork: Wiley.