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AXLE CORPORATION PAPER

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$14,000 on July 1 of year one when it was fully expensed under § 168(k), and the distribution is made on January 1 of year seven.

 

3. Adam, Betty, Carmen, the ABC Partnership, BCA Corporation, and the Munster Family Trust own shares of Zebra Corporation’s single class of stock as follows:

 

Shareholder

Shares held

Adjusted basis

Adam

600

$150,000

Betty (Adam’s sister)

1000

$250,000

Carmen (Adam’s daughter)

200

$50,000

ABC Partnership

400

$100,000

BCA Corporation

1200

$300,000

Munster Family Trust

600

$150,000

Total

4000

 

 

The Zebra shareholders have owned their shares for more than one year. The partners of the ABC Partnership have the following interests in the partnership: Adam 40%, Betty 30%, and Carmen 30%. The shareholders of BCA Corporation own shares as follows: Adam 10%, Betty 60%, and Carmen 30%. The equal beneficiaries of the Munster Family Trust are Devon (Adam’s grandson) and Jane (Betty’s granddaughter). Adam is considering having Zebra redeem some of her shares in exchange for cash. On the day of the planned redemption, Zebra will have $50,000 of current E&P and $150,000 of prior accumulated E&P. Determine the tax consequences of the following two independent transactions to Adam and Zebra Corporation.

 

a. Zebra redeems 100 shares of its stock from Adam in exchange for $160,000.

b. Zebra redeems 300 shares of its stock from Adam in exchange for $480,000.

 

MINI CASE

 

Axle Corporation was formed in 1995. It is based in Iowa and operates throughout the US Midwest. Axle is owned by the Miller family, one-third each by sister Midge (age 38), sister Trudy (age 51), and brother Jack (age 45). The company controls about $250 million in productive and investment assets, most of which are located in Iowa.

 

Axle started out as a wholesale distributor of paint and lacquer products, purchasing gallon-size and larger containers of paints from chemical companies and selling them mainly to retailers in its operating region. Over time, though, the company moved into the manufacturing process as well, purchasing raw chemicals and processing them at its Iowa plant so as to develop its own line of paints, thinners, and spray cans. These manufactured products are sold to the big-box chains, including Ace and Lowes, for retail distribution throughout the world.

 

Both divisions of Axle have been highly profitable, and they are almost recession-proof. The distribution division operates near the Des Moines airport and has prime access to the interstate highway system. There is adjacent vacant land in case Axle wants to expand those operations. The manufacturing division is located along the river in

 

 

 

Page 2 of 4

 

 

Davenport. Corporate headquarters take up an entire office building in downtown Des Moines.

 

The distribution operations are not quite a cash business, but the receivables cycle is very short. Axle’s distribution operations have developed into the model of efficiency for the industry, with quick turnaround and a computer-based structure coordinating the flow of goods into the company, and the air and truck system of outflow.

 

The manufacturing division requires a larger capital investment, and thus it is highly leveraged. There also is exposure to environmental damage from chemical spills, and to lawsuits concerning the effects of the spray-can gases on the ozone. No such damages yet have been incurred by Axle, although one of its west-coast competitors recently filed for bankruptcy protection after losing a District Court challenge from a global-warming activist group.

 

Axle is self-insured relative to these contingencies. But it has found that the mark-up that it can build into the prices it charges customers is so large when Axle controls the product starting with raw materials, the return on investment cannot be matched in any other way.

 

Axle has been showing an annual fifteen to twenty percent return on equity for the past five years. The officer and management group, longtime employees not related to the Millers, see only future growth in operations and profits for the next decade, and they are all committed to Axle and to Iowa for the long-term.

 

The balance sheet of the company includes the sum of the sub-accounts indicated below.

 

As a profitable regional operation, Axle regularly receives offers from investors interested in a takeover. The Millers have resisted all of these offers so far, but Midge and Jack are interested in funding a “second career” by cashing out of the family business. Trudy, a Cornell MBA, believes that the company would be better off by downsizing operations so that the open-ended exposure to the contingent liabilities can be reduced; she also maintains that the family could better control the business if Axle remained a smaller operation.

 

These differences in agenda among the entity and its shareholders have frozen the parties from considering the takeover offers at any length. But the latest correspondence with the private-equity Cooke Group Inc (a closely held C corporation) is almost too tempting to refuse. Cooke wants to acquire the distribution operations, and not the manufacturing division. Cooke says that it will convey $100 million for the distribution division, but only if the transaction is completed within eighteen months, and the federal income tax consequences are favorable to the group.

 

You are not Axle’s auditor or regular tax consultant, but your reputation in the Midwest is as the “Master Deal Maker,” because you bring both a high level to technical tax expertise and a skill in negotiating an offer that typically is compelling to “both sides” of the transaction.

 

 

 

Page 3 of 4

 

 

4. Consider the alternative of complete liquidation of Axle. A complete liquidation of Axle would be followed by a cash purchase of the distribution division by the Cooke group, and of the corporate and manufacturing assets by the Millers. What are the tax consequences to all the parties involved?

 

5. Consider either a Type A or Type C reorganization. What are the tax consequences to all the parties involved?

 

 

 

 

AXLE CORPORATION CURRENT BALANCE SHEETS

 

 

CORPORATE COMMON

 

DISTRIBUTION DIVISION MANUFACTURING DIVISION ASSETS

 

 

 

 

Fair Market

Tax Basis

Fair Market

Tax Basis

Fair Market

 

Tax Basis ($M)

Value ($M)

($M)

Value ($M)

($M)

Value ($M)

Cash, Receivables

10

9.75

10

9.75

 

 

 

 

 

 

 

 

 

Inventory

4

9

4

18

 

 

 

 

 

 

 

 

 

Land, buildings, equipment

20

11

75

60

 

 

 

 

 

 

 

 

 

Long-term debt associated with land,

 

 

 

 

 

 

buildings, equipment

-4

-3.75

-69

-68.75

 

 

 

 

 

 

 

 

 

Vacant Des Moines land, not divisible per

 

 

 

 

 

 

zoning agreements

3

11

 

 

 

 

 

 

 

 

 

 

 

Software and processes, distribution systems --

 

 

 

 

 

 

proprietary

11

25

 

 

 

 

 

 

 

 

 

 

 

Corporate headquarters, building and land

 

 

 

 

13

18

 

 

 

 

 

 

 

Vacant land in Minnesota, held for

 

 

 

 

 

 

speculation, purchased three years ago, five

 

 

 

 

 

 

divisible lots

 

 

 

 

50

52

 

 

 

 

 

 

 

Various US and non-US financial assets, held

 

 

 

 

 

 

for long-term investment

 

 

 

 

72

95

 

 

 

 

 

 

 

Goodwill from industry reputation and

 

 

 

 

 

 

corporate citizenship

 

 

 

 

0

40

 

 

 

 

 

 

 

Contribution to Corporate Net Worth

44

62

20

19

135

205

 

 

 

 

 

 

 

Annual Book Revenues

60

 

150

 

 

 

Annual Book After-Tax Profit

8

 

31

 

 

 

 

 

 

 

 

 

 

Accumulated Earnings and Profits

40

 

100

 

5

 

 

 

 

 

 

 

 

Federal income tax credit carryforwards

0

 

12

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$14,000 on July 1 of year one when it was fully expensed under § 168(k), and the distribution is made on January 1 of year seven.

 

3. Adam, Betty, Carmen, the ABC Partnership, BCA Corporation, and the Munster Family Trust own shares of Zebra Corporation’s single class of stock as follows:

 

Shareholder

Shares held

Adjusted basis

Adam

600

$150,000

Betty (Adam’s sister)

1000

$250,000

Carmen (Adam’s daughter)

200

$50,000

ABC Partnership

400

$100,000

BCA Corporation

1200

$300,000

Munster Family Trust

600

$150,000

Total

4000

 

 

The Zebra shareholders have owned their shares for more than one year. The partners of the ABC Partnership have the following interests in the partnership: Adam 40%, Betty 30%, and Carmen 30%. The shareholders of BCA Corporation own shares as follows: Adam 10%, Betty 60%, and Carmen 30%. The equal beneficiaries of the Munster Family Trust are Devon (Adam’s grandson) and Jane (Betty’s granddaughter). Adam is considering having Zebra redeem some of her shares in exchange for cash. On the day of the planned redemption, Zebra will have $50,000 of current E&P and $150,000 of prior accumulated E&P. Determine the tax consequences of the following two independent transactions to Adam and Zebra Corporation.

 

a. Zebra redeems 100 shares of its stock from Adam in exchange for $160,000.

b. Zebra redeems 300 shares of its stock from Adam in exchange for $480,000.

 

MINI CASE

 

Axle Corporation was formed in 1995. It is based in Iowa and operates throughout the US Midwest. Axle is owned by the Miller family, one-third each by sister Midge (age 38), sister Trudy (age 51), and brother Jack (age 45). The company controls about $250 million in productive and investment assets, most of which are located in Iowa.

 

Axle started out as a wholesale distributor of paint and lacquer products, purchasing gallon-size and larger containers of paints from chemical companies and selling them mainly to retailers in its operating region. Over time, though, the company moved into the manufacturing process as well, purchasing raw chemicals and processing them at its Iowa plant so as to develop its own line of paints, thinners, and spray cans. These manufactured products are sold to the big-box chains, including Ace and Lowes, for retail distribution throughout the world.

 

Both divisions of Axle have been highly profitable, and they are almost recession-proof. The distribution division operates near the Des Moines airport and has prime access to the interstate highway system. There is adjacent vacant land in case Axle wants to expand those operations. The manufacturing division is located along the river in

 

 

 

Page 2 of 4

 

 

Davenport. Corporate headquarters take up an entire office building in downtown Des Moines.

 

The distribution operations are not quite a cash business, but the receivables cycle is very short. Axle’s distribution operations have developed into the model of efficiency for the industry, with quick turnaround and a computer-based structure coordinating the flow of goods into the company, and the air and truck system of outflow.

 

The manufacturing division requires a larger capital investment, and thus it is highly leveraged. There also is exposure to environmental damage from chemical spills, and to lawsuits concerning the effects of the spray-can gases on the ozone. No such damages yet have been incurred by Axle, although one of its west-coast competitors recently filed for bankruptcy protection after losing a District Court challenge from a global-warming activist group.

 

Axle is self-insured relative to these contingencies. But it has found that the mark-up that it can build into the prices it charges customers is so large when Axle controls the product starting with raw materials, the return on investment cannot be matched in any other way.

 

Axle has been showing an annual fifteen to twenty percent return on equity for the past five years. The officer and management group, longtime employees not related to the Millers, see only future growth in operations and profits for the next decade, and they are all committed to Axle and to Iowa for the long-term.

 

The balance sheet of the company includes the sum of the sub-accounts indicated below.

 

As a profitable regional operation, Axle regularly receives offers from investors interested in a takeover. The Millers have resisted all of these offers so far, but Midge and Jack are interested in funding a “second career” by cashing out of the family business. Trudy, a Cornell MBA, believes that the company would be better off by downsizing operations so that the open-ended exposure to the contingent liabilities can be reduced; she also maintains that the family could better control the business if Axle remained a smaller operation.

 

These differences in agenda among the entity and its shareholders have frozen the parties from considering the takeover offers at any length. But the latest correspondence with the private-equity Cooke Group Inc (a closely held C corporation) is almost too tempting to refuse. Cooke wants to acquire the distribution operations, and not the manufacturing division. Cooke says that it will convey $100 million for the distribution division, but only if the transaction is completed within eighteen months, and the federal income tax consequences are favorable to the group.

 

You are not Axle’s auditor or regular tax consultant, but your reputation in the Midwest is as the “Master Deal Maker,” because you bring both a high level to technical tax expertise and a skill in negotiating an offer that typically is compelling to “both sides” of the transaction.

 

 

 

Page 3 of 4

 

 

4. Consider the alternative of complete liquidation of Axle. A complete liquidation of Axle would be followed by a cash purchase of the distribution division by the Cooke group, and of the corporate and manufacturing assets by the Millers. What are the tax consequences to all the parties involved?

 

5. Consider either a Type A or Type C reorganization. What are the tax consequences to all the parties involved?

 

 

 

 

AXLE CORPORATION CURRENT BALANCE SHEETS

 

 

CORPORATE COMMON

 

DISTRIBUTION DIVISION MANUFACTURING DIVISION ASSETS

 

 

 

 

Fair Market

Tax Basis

Fair Market

Tax Basis

Fair Market

 

Tax Basis ($M)

Value ($M)

($M)

Value ($M)

($M)

Value ($M)

Cash, Receivables

10

9.75

10

9.75

 

 

 

 

 

 

 

 

 

Inventory

4

9

4

18

 

 

 

 

 

 

 

 

 

Land, buildings, equipment

20

11

75

60

 

 

 

 

 

 

 

 

 

Long-term debt associated with land,

 

 

 

 

 

 

buildings, equipment

-4

-3.75

-69

-68.75

 

 

 

 

 

 

 

 

 

Vacant Des Moines land, not divisible per

 

 

 

 

 

 

zoning agreements

3

11

 

 

 

 

 

 

 

 

 

 

 

Software and processes, distribution systems --

 

 

 

 

 

 

proprietary

11

25

 

 

 

 

 

 

 

 

 

 

 

Corporate headquarters, building and land

 

 

 

 

13

18

 

 

 

 

 

 

 

Vacant land in Minnesota, held for

 

 

 

 

 

 

speculation, purchased three years ago, five

 

 

 

 

 

 

divisible lots

 

 

 

 

50

52

 

 

 

 

 

 

 

Various US and non-US financial assets, held

 

 

 

 

 

 

for long-term investment

 

 

 

 

72

95

 

 

 

 

 

 

 

Goodwill from industry reputation and

 

 

 

 

 

 

corporate citizenship

 

 

 

 

0

40

 

 

 

 

 

 

 

Contribution to Corporate Net Worth

44

62

20

19

135

205

 

 

 

 

 

 

 

Annual Book Revenues

60

 

150

 

 

 

Annual Book After-Tax Profit

8

 

31

 

 

 

 

 

 

 

 

 

 

Accumulated Earnings and Profits

40

 

100

 

5

 

 

 

 

 

 

 

 

Federal income tax credit carryforwards

0

 

12

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Page 4 of 4

 

 

 

Page 4 of 4

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[Solved] AXLE CORPORATION PAPER

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$14,000 on July 1 of year one when it was fully expensed under § 168(k), and the distribution is made on January 1 of year seven. 3.Adam, Betty, Carmen, the ABC Partnership, BCA Corporation, and the Munster Family Trust own shares of Zebra Corporation’s single class of stock as follows: Shareholder Shares held Adjusted basis Adam 600 $150,000 Betty (Adam’s sister) 1000 $250,000 Carmen (Adam’s daughter) 200 $50,000 ABC Partnership 400 $100,000 BCA Corporation 1200 $300,000 Munster Family Trust 600 $150,000 Total 4000 The Zebra shareholders have owned their shares for more than one year. The partners of the ABC Partnership have the following interests in the partnership: Adam 40%, Betty 30%, and Carmen 30%. The shareholders of BCA Corporation own shares as follows: Adam 10%, Betty 60%, and Carmen 30%. The equal beneficiaries of the Munster Family Trust are Devon (Adam’s grandson) and Jane (Betty’s granddaughter). Adam is considering having Zebra redeem some of her shares in exchange for cash. On the day of the planned redemption, Zebra will have $50,000 of current E&P and $150,000 of prior accumulated E&P. Determine the tax consequences of the following two independent transactions to Adam and Zebra Corporation. a.Zebra redeems 100 shares of its stock from Adam in exchange for $160,000. b.Zebra redeems 300 shares of its stock from Adam in exchange for $480,000. MINI CASE Axle Corporation was formed in 1995. It is based in Iowa and operates throughout the US Midwest. Axle is owned by the Miller family, one-third each by sister Midge (age 38), sister Trudy (age 51), and brother Jack (age 45). The company controls about $250 million in productive and investment assets, most of which are located in Iowa. Axle started out as a wholesale distributor of paint and lacquer products, purchasing g...
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AXLE CORPORATION PAPER

$14,000 on July 1 of year one when it was fully expensed under § 168(k), and the distribution is made on January 1 of year seven. 3.Adam, Betty, Carmen, the ABC Partnership, BCA Corporation, and the Munster Family Trust...

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