Assume the following factors in assessing the value of preserving NOLs in the acquisition of a target: • The target corporation has NOLs of $675.
• The net basis in the target’s assets is $200.
• The cash price an acquirer is willing to pay for the stock of the target is $900.
• Target shareholders have a basis in the stock of the target of $400.
• The corporate tax rate is 35%.
• The shareholder capital gains tax rate is 20%
. • The after-tax discount rate is 10%.
• Any step-up in the tax basis of the target’s assets is amortized over 10 years on a straight-line basis.
• The appropriate long-term tax-exempt rate applicable to target NOLs under Section 382 is 4%. The target’s NOLs will expire in 20 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. What if the step-up in the tax basis of the target’s assets is amortized straight-line over a 15- year period, and the long-term tax-exempt rate applicable to target NOLs under Section 382 is 4.75%? 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?