322 Planning and Forecasting
The second reason Morris is not concerned is that he does not anticipate any
losses from this business; historically, it is very profitable. Therefore, let us de-
part from this detour into unprofitability and consider Morris’s acquisition of
the plastics plant.
ACQUISITION
Morris might well believe that the hard part of accomplishing a successful ac-
quisition is locating an appropriate target and integrating it into his existing op-
eration. Yet, once again, he would be well advised to pay some attention to the
various tax strategies and results available to him when structuring the acquisi-
tion transaction.
To begin with, Morris has a number of choices available to him in acquir-
ing the target business. Simply put, these choices boil down to a choice among
acquiring the stock of the owners of the business, merging the target corpora-
tion into Plant Supply, or purchasing the assets and liabilities of the target. The
choice of method will depend on a number of factors, many of which are not
tax related. For example, acquisition by merger will force Plant Supply to ac-
quire all the liabilities of the target, even those of which neither it nor the tar-
get may be aware. Acquisition of the stock of the target by Plant Supply also
results in acquisition of all liabilities but isolates them in a separate corpora-
tion, which becomes a subsidiary. (The same result would be achieved by merg-
ing the target into a newly formed subsidiary of Plant Supply—the so-called
triangular merger.) Acquisition of the assets and liabilities normally results
only in exposure to the liabilities Morris chooses to acquire and is thus an at-
tractive choice to the acquirer (Exhibit 11.3).
Yet tax factors normally play a large part in structuring an acquisition. For
example, if the target corporation has a history of losses and thus boasts a tax-
loss carryfor ward, Morris may wish to apply such losses to its future profitable
operations. This application would be impossible if he acquired the assets and
liabilities of the target for cash since the target corporation would still exist
after the transaction, keeping its tax characteristics to itself. Cash mergers are
treated as asset acquisitions for tax purposes. However, if the acquirer obtains
the stock of the target, the acquirer has taken control of the taxable entity it-
self, thus obtaining its tax characteristics for future use. This result inspired a
lively traffic in tax-loss carryfor wards in years past, where failed corporations
were marketed to profitable corporations seeking tax relief.
Congress has put a damper on such activity by limiting the use of a tax-
loss carryfor ward in each of the years following an ownership change of more
than 50% of a company’s stock. The amount of that limit is the product of the
value of the business at acquisition (normally its selling price) times an interest
rate linked to the market for federal treasury obligations. This amount of tax-
loss carryforward is available each year, until the losses expire (15 to 20 years