Category: Corporations Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com You have requested research assistance concerning the following facts. Taxpayer (TP) is an S corporation. On 12/31/92 after the close of business, TP purchased all the stock of a C corporation (SUB). Within a few days, SUB was merged into TP under the laws of Pennsylvania. TP was the survivor of the merger. No election was made under Section 338. The tax basis of SUB's assets at the date of the merger was approximately $3.8 million. The assets were subject to indebtedness of about $.8 million. The purchase price of the stock was $4 million. Amortization Issue After seeing the facts in some detail and after reflecting on this matter, it seems to me that it is not necessary to address this issue. While it is true that there is an intangible asset (presumably goodwill) created as a result of this transaction, it is inescapable that the asset has no tax basis. Assuming that the merger of SUB into TP was indeed a tax free transaction (either an A-type reorganization or a tax free liquidation of a subsidiary under §332) the basis of SUB's assets carries over to TP. In essence, this result flows from a) having made the decision to purchase stock instead of assets; and b) once having decided on a stock purchase there was the further decision not to make an election under §338. This is not at all to say that these choices were inappropriate. In order to achieve a step-up in basis for the assets acquired in this transaction, it would have been necessary to pay tax on the difference between the $4.8 million purchase price and the $3.8 tax basis. Presumably all this was taken into account in negotiating the purchase price. I look forward to speaking with you regarding this matter. |
