Assume the following factors in assessing the sensitivity of the optimal acquisition structure when the target has NOLs:
• The target corporation (a freestanding C corporation) has NOLs of $16,500.
• The net basis in the target’s assets is $1,800.
• The cash price an acquirer is willing to pay for the stock of the target is $19,275.
• Target shareholders have a basis in the stock of the target of $4,000.
• The corporate tax rate is 35%.
• The shareholders capital gains tax rate is 20%.
• The after-tax discount rate is 7%.
• Any step-up in the tax basis of the target’s assets is amortized over 15 years on a straight-line basis.
• The appropriate long-term tax-exempt rate applicable to target NOLs under Section 382 is 5%. The target’s NOLs will expire in 12 years.
a. Should the acquirer make a Section 338 election and use the target’s NOLs to offset any gain on the step-up, or should it forgo the election and preserve the target’s NOLs?
b. Now instead assume the after-tax discount rate is 9%. What structure—to make or forgo the Section 338 election—do you recommend?
c. Starting with the part (a) assumptions, assume instead the target’s NOLs expire in 17 years and the after-tax discount rate is 7%. What structure—to make or forgo the Section 338 election— do you recommend?
d. Starting with the part a assumptions, assume instead the step-up in the tax basis of the target’s assets is amortized over 20 years and the after-tax discount rate is 11%. What structure—to make or forgo the Section 338 election—do you recommend?