In a tax-free business combination, A. the income tax basis for acquired assets

Question

In a tax-free business combination, A. the income tax basis for acquired assets and liabilities is adjusted to current fair value. B. any goodwill created by the combination may be amortized in calculating taxable income. C. the subsidiary's assets and liabilities are assigned an income tax basis of zero dollars, so that they will have no future income tax consequences. D. any goodwill created by the combination must be deducted in total in calculating taxable income. E. the subsidiary's cost basis for assets are retained for income tax calculations.

Explanation / Answer

The answer is " the subsidiary's cost basis for assets are retained for income tax calculations." Option "e".

As per internal revenue code (IRC) section 368, tax free business combinations are similar to taxable deals. The subsidiary does not recognize a taxable gain on the transfer of assets to the parent company. For example, in the case of a forward triangular merger, the target is merged into a subsidiary. The subsidiary is isolated as a separate legal entity. Thus, the cost basis of the subsidiary is retained for income tax calculations.

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