Sec. 338 Election. Gator Corporation is considering the acquisition of Bulldog
Corporation’s stock in exchange for cash. Two options are being considered: (1) Gator
acquires the assets from Bulldog for $1.4 million or (2) Gator acquires the Bulldog stock
for $1 million and makes a Sec. 338 election shortly after the stock acquisition. Bulldog
has no NOL or capital loss carryovers. Bulldog’s balance sheet is presented below.
Assets Adjusted basis FMV liabilities
Cash $100,000 $100,000 Short-term debt $200,000
Marketable securities 140,000 200,000 Long-term debt 200,000
Accounts receivable 100,000 100,000 Paid-in capital 300,000
Inventory (FIFO) $100,000 $ 150,000 Retained earnings $ 700,000
Plant and equipment 200,000 500,000
Intangibles 0 3 50,000
Total Total $640,000 $1,400,000 Total $1,400,000
a. What advantages would accrue to Gator Corporation if it acquires the assets directly?
What disadvantages would accrue to Bulldog Corporation if it sells the assets and then
liquidates?
b. What advantages would accrue to Gator Corporation if it acquires the Bulldog stock
for cash and subsequently makes a Sec. 338 election? What advantage would accrue to
Bulldog Corporation if its shareholders sell the Bulldog stock?
c. How would your analysis change if Bulldog had incurred $250,000 of NOLs in the
current year that it cannot carry back in full due to low taxable income being reported
in the preceding two years?
Tags: