Message Please leave this field empty. An asset purchase allows the buyer to step up the tax basis of the acquired assets to reflect the purchase price. In turn, that results in higher post-acquisition depreciation and amortization deductions for depreciable and amortizable assets and lower taxable gains when other purchased assets such as receivables and inventory are sold or converted into cash.
However, asset purchases also have some negative considerations for buyers. The target company might also have some valuable nontransferable assets, such as a favorable building lease, licenses and customer contracts. With an asset purchase, it might be difficult or impossible to obtain legal ownership of these assets, and that could be a dealbreaker.
After closing, the buyer would own the target company, and the target company would own the desired assets. Section Elections. Under Sec. Essentially, the buyer gets a valuable tax basis step-up advantage without the legal hassles associated with an actual asset purchase.
With a Sec. In other words, making a Sec. An Alternative Election for Noncorporate Buyers. See main article. Common tools like Sec. These hazards can significantly affect the structuring of cross-border transactions.
Beyond risk assessment, tax implications can influence valuation and return on investment. It does not provide an exhaustive overview of all considerations but rather provides commentary on these three often overlooked or misunderstood factors potentially disrupting international transactions following the TCJA.
New twists to old Sec. A Sec. This potentially subjects the seller to two levels of tax. The seller recognizes gain or loss on the sale of target stock, and the target itself recognizes gain or loss on the deemed sale of its assets.
For obvious reasons, the election and its two levels of tax have limited utility in the context of domestic entity acquisitions.
However, the election is common when the acquisition is a foreign target where taxation at the foreign corporate level may not result in incremental U.
When a purchaser makes a Sec. Old Foreign Target is then deemed to be a new corporation New Foreign Target that purchases all of Old Foreign Target's assets as of the beginning of the day after the acquisition date. This deemed sale of assets results in a corporate-level gain and corresponding corporate-level tax. Unlike a Sec. An illustration of this deemed fiction is shown in the chart "Sec.
A purchaser making a Sec. For federal income tax purposes, a Sec. The election also allows a buyer to obtain the benefits of an asset purchase for federal income tax purposes while respecting the form of the transaction as a stock sale for business, legal, and certain non-U. This produces several benefits unattainable in a true asset sale, such as the potential preservation of foreign tax attributes.
There are also several consequences. However, the TCJA significantly overhauled the international tax system that dictates the outcome of such an election. As a result, taxpayers need to rethink where and when to use the election. For example, if the seller is a U. The excess of a U. Whether a GILTI inclusion has negative or positive effects on the sale of stock depends on several factors.
Still, U. The outcome may not always be favorable. In instances when Old Foreign Target's inside asset basis is low, the incremental U. As a result, U. Another aspect of the Sec. Pre-TCJA, the additional amortization and depreciation deduction afforded by the step-up in asset basis was nearly always positive. For example, if the election is not made and the foreign target is in a country with a tax rate high enough to eliminate any incremental tax from GILTI inclusions by virtue of foreign tax credits, then the amortization and depreciation deductions could ultimately do more harm than good.
This is because without the election, the current-year earnings could be includible in U. The inclusion creates U. This tax basis will reduce any future capital gain when exiting the investment. Now, contrast that result with a situation where the election is made, and the GILTI inclusion may be reduced or eliminated. Thus, any potential basis increases under Sec. This can result in a higher capital gain upon exiting the investment in Foreign Target.
Many of these are summarized in the table "Pros and Cons of the Sec. A subsequent distribution of previously taxed income would then reduce the shareholder's basis under Sec. To the extent an amount distributed exceeds the shareholder's basis in the foreign corporation, the amount received in excess of stock basis would generally be treated as capital gain. Because K is not the purchasing corporation or an affiliate thereof , section cannot apply to K's exchange of T stock for X stock in the merger of T into X unless the transfer of T's assets is pursuant to a reorganization as determined without regard to this paragraph d.
Under general principles of tax law applicable to reorganizations , the continuity of interest requirement is not satisfied because P's stock purchase and the merger of T into X are pursuant to an integrated transaction in which A, the owner of 85 percent of the stock of T, received solely cash in exchange for A's T stock. See, e. Commissioner, 61 T. Commissioner, 60 T. K recognizes gain or loss , if any, pursuant to section c with respect to its T stock. Please help us improve our site! No thank you.
CFR prev next. Prior to January 1, Year 1, S decided to discontinue its involvement in one line of business. To accomplish this, S forms a new corporation, Newco, with a nominal amount of cash. Shortly thereafter, on January 1, Year 1, S transfers all the stock of the subsidiary conducting the unwanted business T to Newco in exchange for shares of Newco common stock and a Newco promissory note. On that date, R owns 4 of the shares of T stock. On June 1 of Year 1, R acquires an additional 16 shares of T stock.
On December 1 of Year 1, P purchases 70 shares of T stock from an unrelated person and 12 of the 20 shares of T stock held by R. That R stock is not acquired by purchase. On June 1 of Year 1, P purchases an additional 25 percent in value of the R stock, and on January 1 of Year 2, P purchases another 25 percent in value of the R stock.
On June 1 of Year 2, R acquires an additional 16 shares of the T stock. On December 1 of Year 2, P purchases 68 shares of the T stock from an unrelated person and 12 of the 20 shares of the T stock held by R. Assume the same facts as in Example 3, except that on February 1 of Year 1, P acquires 25 percent in value of the R stock by purchase. The result is the same as in Example 3. A owns all of the T stock. T owns 50 of the shares of X stock. A qualified stock purchase of X is made on December 1 of Year 1, because the deemed purchase of 50 shares of X stock by new T because of the section election for T and the actual purchase of 50 shares of X stock by P are treated as purchases made by one corporation.
Section h 8. For purposes of determining whether those purchases occur within a month acquisition period as required by section d 3 , T is deemed to purchase its X stock on T's acquisition date, i. Example 1. QSP on stock purchase date; redemption from unrelated person during month period. A owns all shares of T stock. On July 1 of Year 1, T redeems 25 shares from A. P makes a qualified stock purchase of T on December 1 of Year 1, because the 60 shares of T stock purchased by P within the month period ending on that date satisfy the percent ownership requirements of section d 3 i.
Example 2. QSP on stock redemption date; redemption from unrelated person during month period. The facts are the same as in Example 1, except that P purchases 60 shares of T stock on January 1 of Year 1 and none on December 1 of Year 1. P makes a qualified stock purchase of T on July 1 of Year 1, because that is the first day on which the T stock purchased by P within the preceding month period satisfies the percent ownership requirements of section d 3 i.
Example 3. Redemption from purchasing corporation not taken into account. On December 15 of Year 1, T redeems 30 percent of its stock from P. The redeemed stock was held by P for several years and constituted P's total interest in T. P does not make a qualified stock purchase of T on December 1 of Year 2.
For purposes of the percent ownership requirements of section d 3 , the redemption of P's T stock on December 15 of Year 1 is not taken into account as a reduction in T's outstanding stock. Example 4. Redemption from related person taken into account.
On January 1 of Year 1, P purchases 60 of the shares of X stock.
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