You will be completing a tax memo on the following fact pattern. Basically, you\

Question

You will be completing a tax memo on the following fact pattern. Basically, you'll be writing a memo to a client advising him based on current tax law (prior to recent 2017 legislation).

Acquire, Inc. (client), an S Corp, is seeking to acquire Target, LLC (taxed as a C Corporation). Target has 3 shareholders with two of them holding 20% each and one holding 60% of its total shares (1,000 shares total between all 3 shareholders). Only one of Target's shareholders is a non US citizen.

The market value of each Target share is worth $1,000/per share. Each share has a cost basis of $25 per share. The fair market value of Target's assets are $800,000 with a cost basis of $200,000. One of the assets include commercial real estate with a fair market value of $200,000 with a liability (mortgage) of $220,000 that can be assumed by Acquire, Inc.

Acquire, Inc's shares are valued at $500/per share with a cost basis of $50 per share. The total shares outstanding is 1,000 all solely own by sole shareholder (Mr. Client-Shareholder). Acquire's total corporate assets are valued at $400,000 with a cost basis of $200,000.

Client (Acquire, Inc.) wants to know whether it's possible to acquire Target, Inc. without any taxable consequences to the company or to Mr. Sole Shareholder-Client? Discuss. The options to acquire the company may be done through either purchasing the assets or the shares. Please be sure to cite any statute or support for your reasoning.

Explanation / Answer

LLC (taxed as a C Corporation)

Suppose three shareholders are A,B and C

no. of Shares = 1000

A 's Share

20% of 1000 = 20/100 *1000 = 200

B 's Share

20% of 1000 = 1000 *20/100 = 200

C 's Share

60% of 1000 = 1000 * 60/100 = 600

market value of shares is $1000/share

market price of 1000 shares = 1000 *1000 = $1000000

A 's investment = 200 *1000 = $200000

B 's investment = 200 *1000 = $200000

C's investment = 600 *1000 = $600000

cost basis 25/share

Total cost = 1000 *25 = 25000

Shares value after deducting cost = 1000000 - 25000 = $975000

Target company's Assets = $800000

Cost basis = $200000

value of assets = $800000 - $200000 = $600000

Commercial real state assets = 200000 (with 220000 liabilities) = $22000 liabilities on real state assets

Total wealth =$975000 + $600000 - $20000 = $1555000

S. Corporation Acquire LLC

Shares = 500 * 1000 (no. of share 1000 @ rate 500/share)

Paid for shares = 500 *1000 = 500000

cost basis = 50/share

for 1000 shares = 1000 * 50 = $50000

capital gains on shares = $500000 - $50000 = $450000

Assets valued at $400000

Cost basis = $200000

Capital gains on assets = $400000 - $200000 = $200000

Purchase price for acquisition = $500000 +$200000 = $700000

Total Capital gains of S Corporation acquiring LLC = Capitals gains on shares + capital gains on assets = $450000 + $200000 =$650000

Capital gain tax on $650000 is

Total Capital Gains Taxes = $650000 *25/100 =$162500

Tax Type Marginal Tax Rate Effective Tax Rate Tax Amount Federal 25.00% 25.00% 650000 State .00% 0.00% $0 Local 0.00% 0.00% $0

Total Capital Gains Taxes = $650000 *25/100 =$162500

$

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.