Consider the following facts to quantify the tax costs of various taxable acquisition structures when the target is a freestanding C corporation. Wolverine, Inc., wants to purchase Reel Deal, Inc., in a taxable acquisition. Reel Deal is a freestanding C corporation with a net asset tax basis of $250. Reel Deal has no NOLs (Net Operating Losses) and is currently owned by five shareholders that have a basis their Reel Deal stock of $5. Wolverine is planning to offer them $10,000 for all of the assets of Reel Deal. The corporate tax rate is 40%, the after-tax discount rate is 15%, and the shareholder-level capital gains tax rate is 20%.
A. How much cash after tax will the shareholders of Reel Deal have in a taxable asset sale at a price of $10,000?
B. What is Wolverine's net-after tax cost of this transaction assuming that any step-up in Reel Deal's assets are amortized/depreciated over 15 years straight-line, the appropriate corporate tax rate is 40%, and the after-tax discount rate is 15%?
C. What price could Wolverine pay for Reel Deal in a taxable stock acquisition without a Section 338 election? What would Wolverine's net after tax cost of this structure be?
D. Given the price computed in part c, what would ADSP be if Wolverine decided to make the Section 338 election? What would Wolverine's net after-tax cost be with this structure of a taxable stock sale with a Section 338 election?
E. Which structure should be used in this acquisition? Why?