Question: Bailey Corporation owns a number of automotive
Bailey Corporation owns a number of automotive parts shops. Bill Smith owns an automotive parts shop that has been in existence for 40 years and has competed with one of Bailey’s branches. Bill is considering retiring and would like to sell his business. He has his CPA prepare the following balance sheet, which he presents to John Bailey, president of Bailey Corporation and a long-time friend of Bill’s. 
If Bailey Corporation pursues the acquisition, it will operate the automotive parts shop under its own tradename in the location Bill has used for 40 years. Mr. Bailey has asked you to prepare a summary of the tax consequences of the following three transactions: (1) a cash purchase of the noncash assets, (2) a purchase of the stock of Bill’s corporation with cash and Bailey notes, and (3) an asset-for-stock reorganization conducted exclusively with Bailey stock. Upon interviewing Bill, you obtain the following additional information: Bill’s business is operated as a C corporation. Bill has a $160,000 adjusted basis in his stock. Accounts payable of $200,000 are outstanding. The corporation has depreciated the building under the straight-line method and to date has claimed $100,000 in depreciation. The equipment is Sec. 1245 property for which the corporation has claimed $150,000 in depreciation. The after-tax profits in each of the last three years have exceeded $300,000. Bill suspects that some goodwill value exists that is not shown on the balance sheet. No NOL carryovers are available from prior years. Required: Prepare a memorandum that outlines the tax consequences of each of the three alternative acquisitions. Assume that the anticipated cash purchase price is $2.55 million for the noncash assets and $2.6 million for the stock. Furthermore, assume that the transaction takes place in the current year. How would the acquiring corporation report each of the three alternatives under GAAP?
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Assets Adjusted Basis $ 250,000 75,000 600,000 200,000 30,000 30,000 $1,185,000 FMV Cash Accounts receivable Inventories (LIFO) Equipment Building Land $ 250,000 70,000 1,750,000 250,000 285,000 115,000 $2,720,000 Total
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> Why might a parent corporation make a Sec. 338 election after acquiring a target corporation’s stock? When would such an election not be advisable?
> What tax and nontax advantages and disadvantages accrue when an acquiring corporation purchases all of a target corporation’s stock for cash and subsequently liquidates the target corporation?
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> From the standpoint of the target corporation shareholders, what is the advantage of a taxable stock acquisition by a purchaser corporation compared to the purchaser’s acquiring all the target’s assets in a taxable transaction followed by a liquidating d
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> Parent Corporation owns all the stock of Subsidiary Corporation and a substantial amount of Subsidiary Corporation bonds. Subsidiary proposes to transfer appreciated property to Parent in redemption of its bonds pursuant to the liquidation of Subsidiary.
> Parent Corporation owns 80% of the stock of Subsidiary Corporation, which is insolvent. Tracy owns the remaining 20% of the stock. The courts determine Subsidiary to be bankrupt. The shareholders receive nothing for their investment. How do they report t
> Compare the general liquidation rules with the Sec. 332 rules for liquidation of a subsidiary corporation with respect to the following items: a. Recognition of gain or loss by the distributee corporation b. Recognition of gain or loss by the liquidati
> What requirements must be satisfied for the Sec. 332 rules to apply to a corporate shareholder?
> Explain the congressional intent behind the enactment of the Sec. 332 rules regarding the liquidation of a subsidiary corporation.
