replied 1 year ago.
The following is my class tax memorandumProject: XYZ Proposed Acquisition of ABC Corporation Shares/Assets1. ABC Corporation is a software company
2. ABC has been in existence for 5 years. The founders of the company are Able, Baker and Charlie Corporation. When the ABC was originally formed, the shareholders contributed the following:
• Able contributed hardware equipment with basis of $1,000,000 and a fair market value of $2,000,000. A also made a loan of $250,000 to ABC.
• Baker contributed a building with a basis of $3,000,000 and fair market value (at the time of contribution) of $2,000,000.
• Charlie Corporation contributed internally created software with a basis of $10,000 and fair market value of $2,000,000.
3. They have developed a new software package that will help small and middle market businesses accept credit card payments, run business solution apps and be in compliance with credit card privacy issues that are scheduled to go into effect in 2017.While there are other companies in the market developing similar packages, this has been determined by XYZ to be the most compatible with their current electronic payment service offerings.
4. XYZ, our Client, has been actively investigating opportunities to expand their small and middle market business product service offerings to include innovative payment solutions and business management tools. To date, they have incurred $200,000 in consulting fees working with Accenture to identify which possible software solutions. In narrowing their focus to ABC’s software platform, they have incurred an additional $250,000 analyzing various metrics of the ABC platform. Through this analysis, the leadership of XYZ has concluded that the ABC platform would be a very strategic acquisition for XYZ.
5. XYZ has approached Able, Baker and Charlie and initiated discussions regarding XYZ’s interest in acquiring the shares or assets of ABC for $25,000,000.
6. Based on a recent valuation performed by ABC, $25,000,000 appears to be in line with what the FMV of the company is worth with its current assets including the software.Additional Facts:7. Based on a meeting with the business team today, ABC has expressed a need to structure this acquisition as a stock purchase rather than making an asset sale.
8. ABC is part of a consolidated tax-filling group in the US.
9. The based on a review of the Balance Sheet, the following assets will be included in the sale:
a. Customer lists, tax basis = 0, FMV = $8 million
b. Accounts receivable, tax basis = $5,000,000, FMV = same
c. Processing terminals, tax basis = $3,000,000, FMV = $2,500,00010. Based on cash flow availability, XYZ plans to acquire all 100 shares of ABC on installment as follows:
a. 12/1/15 – 10 shares
b. 2/3/16 – 10 shares
c. 6/2/16 – 20 shares
d. 7/1/16 – 20 shares
e. 10/2/16 – 10 shares
f. 12/1/16 – 5 shares
g. 2/1/16 – 25 shares11. XYZ would like our firm to prepare a memorandum highlighting relevant tax issues, potential tax exposures for both XYZ and ABC, as well as, tax efficient planning ideas for saving XYZ tax dollars or acquisition price
12 Please prepare an analysis for the client as to the availability of tax provision that will allow for an inside asset step up in basis and what the cost of that basis step up may be.
Possible options suggested by XYZ’s accounting director are:
a. Liquidation of ABC into XYZ
b. An election under some tax provision that would treat the acquisition as an asset purchase for US tax purposes.
13. From a negotiating standpoint, how would we approach ABC to share any tax costs that result from their insistence on a stock purchase.
14. What information are you going to need to prepare this memo?