350 Planning and Forecasting
that Morris will have to live with the bickering of Brad and Lisa for another
three years.
SALE OF THE CORPORATION
Fortunately for Morris, another solution was not long in coming. Within months
of the failure of his proposal to split up the company, Morris was approached
by the president of a company in a related field, interested in purchasing Plant
Supply. Such a transaction was very intriguing to Morris. He had worked very
hard for many years and would not be adverse to an early retirement. A pur-
chase such as this would relieve him of all his concerns over adequate liquidity
for his estate and strategies for funding his retirement. He could take care of
both Lisa and Victor with the cash he would receive, and both Lisa and Brad
would be free to deal with the acquirer about remaining employed and collect-
ing on their equity.
However, Morris knew better than to get too excited over this prospect
before consulting with his tax advisers. His hesitance turned out to be justi-
fied. Unless a deal was appropriately structured, Morris was staring at a signif-
icant tax bite, both on the corporate and the stockholder levels.
Morris knew from his experience with the molding plant that a corporate
acquisition can be structured in three basic ways: a merger, a sale of stock, and
a purchase of assets. In a merger, the target corporation disappears into the ac-
quirer by operation of law, and the former stockholders of the target receive
consideration from the acquirer. In the sale of stock, the stockholders sell their
shares directly to the acquiring corporation. In a sale of assets, the target sells
its assets (and most of its liabilities) to the acquirer, and the proceeds of the
sale are then distributed to the target’s stockholders through the liquidation of
the target. A major theme of all three of these scenarios involves the acquirer
forming a subsidiary corporation to act as the acquirer in the transaction.
In each case, the difference between the proceeds received by the tar-
get’s stockholders and their basis in the target’s stock would be taxable as capi-
tal gain. Morris was further informed that this tax at the stockholder level
could be avoided if these transactions qualified under the complex rules that
define tax-free reorganizations. In each case, one of the requirements would be
that the target stockholders receive largely stock of the acquirer rather than
cash. Since the acquirer in this case was closely held and there was no market
for its stock, Morris was determined to insist upon cash. He thus accepted the
idea of paying tax on the stockholder level.
Morris was quite surprised, however, to learn that he might also be ex-
posed to corporate tax on the growth in the corporation’s assets over its basis in
them if they were deemed to have been sold as a result of the acquisition trans-
action. For one thing, he had been under the impression that a corporation was
exempt from such tax if it sold its assets as part of the liquidation process. He
was disappointed to learn that this exemption was another victim of the repeal