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Flour Corporation is the parent of Sugar Corporation and owns 100% of the stock of Sugar with an adjusted basis of $1,250,000.
Flour Corporation is the parent of Sugar Corporation and owns 100% of the stock of Sugar with an adjusted basis of $1,250,000. Flour is now interested in acquiring either the assets or the stock of Butter Corporation. Butter holds a valuable license to produce military equipment that Flour is especially interested in obtaining. The license is not transferable. Butter has total assets (including the license) worth $4,000,000 but with an adjusted basis of $1,000,000. Butter has liabilities totaling $600,000 and earnings and profits of $3,000,000. The majority of Butter's shareholders are favorable to a takeover by Flour, but they want the takeover to be tax-free. There are some Butter shareholders who are opposed to the takeover, but they are willing to claim a dissenter's right to be paid the value of their stock in cash. Some of the shareholders of Flour are concerned about assuming all of Butter's liabilities.
a. Discuss at least three different forms in which the takeover can occur to provide tax-free consequences to the shareholders. For this part of the question, ignore the dissenting shareholders. Provide the tax consequences to Flour, Butter and any other corporation involved in any reorganization and provide the adjusted basis in any stock and/or assets transferred. Use the numbers in the problem when appropriate.
b. Assuming that dissenting shareholders own less than 20% of the Butter stock, how would your answers to part a change if the takeover must include buying these shareholders' Butter stock for cash? Assume that each share of Butter stock is worth twice the amount of the FMV of the net assets.
