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Chapter 4
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Type B
Stock-for-stock exchanges Target may be liquidated into acquiring firm or maintained as an independent entity Reverse triangular three-party merger
Acquirer forms a shell subsidiary funded by parent stock Subsidiary is merged into target Parent stock held by subsidiary is distributed to targets shareholders in exchange for their target stock End result: parent owns the stock of the merged subsidiary - target
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Type C
Stock-for-asset transaction; at least 80% of the fair market value of target's property must be acquired Typical transaction
Target firm sells assets in exchange for acquiring firms voting stock Target firm dissolves Target distributes acquiring firm stock in exchange for old canceled target stock
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Main implications
Nontaxable reorganization
Acquiring firm
Net Operating Loss (NOL) carryover Tax-credit carryover No write-up or step-up of depreciable assets
Target firm
Deferred taxable gains for shareholders
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Taxable acquisitions
Acquiring firm
Stepped-up asset basis Loss of NOLs and tax credits
Target firm
Immediate gain recognition by target shareholders Recapture of tax credits and excess depreciation
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Closely held small corporations should be formed as limited liability corporations or S corporations
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Empirical studies
Tax factors significant in less than 10% of merger transactions Tax effects are not the main motivation for merger transactions
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On average, LBOs generated tax increases that were almost 200% of the tax losses they created RJR-Nabisco tax payments were more than eight times pre-LBO taxes
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