Question 1

In the United States, amortization of goodwill is deductible for tax purposes over a period of:

Accepted Answer

Goodwill amortization for tax purposes in the United States is deductible over a 15-year period. This is in accordance with the Internal Revenue Code, which specifies this duration for the amortization of intangible assets, including goodwill.

Question 2

In a Type A reorganization in the United States, at least what percent of the payment to the target must be stock in the acquiring company:

Accepted Answer

In a Type A reorganization, at least 50% of the payment to the target must be in the form of stock of the acquiring company to qualify for tax-deferred treatment.

Question 3

Research by Auerbach and Reishus found that:

Accepted Answer

A

Question 4

Research by Hayn on the role that the tax attributes of transactions played in determining abnormal returns for targets and acquirers found:

Accepted Answer

Hayn's research indicates that various tax attributes, including tax-free status, potential tax benefits from net operating loss carryforwards and unused tax credits, as well as capital gains and the step-up in the basis of acquired assets, play significant roles in determining the abnormal returns for targets and acquirers in M&A transactions.

Question 5

In the United States and under the purchase method, the acquiring company is entitled to income of the acquired company only from the date of purchase.

Accepted Answer

Under the purchase method of accounting for acquisitions in the United States, the acquiring company recognizes the income of the acquired company only from the date of acquisition forward, not for periods prior to the acquisition.

Question 6

In a Type B reorganization in the United States, cash may constitute no more than 20% of the consideration paid for the target's shares.

Accepted Answer

In a Type B reorganization, at least 80% of the consideration paid for the target's shares must be in the form of stock.

Question 7

Research by Auerbach and Poterba and by Altshuler and Auerbach on tax loss carry forwards indicate that the following tax-related factor may offset the otherwise full value of the target's losses:

Accepted Answer

The correct answer is C) Expiration. The research indicates that the value of the target's losses may not be fully realized if the losses expire before they can be utilized by the acquiring company. Tax loss carryforwards have a limited time frame in which they can be applied, and if not used within this period, they expire, thus potentially offsetting their full value.

Question 8

One advantage of a Type C reorganization is that the bidder does not need to be concerned about the target soliciting its shareholder's approval of the transaction.

Accepted Answer

In a Type C reorganization, the target company's shareholders must approve the transaction, as it involves the transfer of substantially all of the target's assets to the acquiring company.

Question 9

Answer: Research by Scholes and Wolfson on M&As before 1981, between 1981 and 1986, and after 1986 found:

Accepted Answer

Scholes and Wolfson's research indicated an intensified level of merger and acquisition (M&A) activity due to tax motives introduced with the 1981 Act, which were then eliminated by the 1986 Act. This suggests that tax legislation can significantly influence corporate M&A behavior.

Question 10

In a Type C reorganization, cash may be used only if 50% of the target shares were purchased with stock.

Accepted Answer

In a Type C reorganization, cash may be used only if 50% or more of the target shares were purchased with stock.

Question 11

Research by Hong, Mandelker, and Kaplan found that stock prices were significantly affected by the choice of acquisition accounting treatments.

Accepted Answer

The answer of Research by Hong, Mandelker, and Kaplan found...

Question 12

In a Type A reorganization in the United States, the following consideration may be used to acquire a target:

Accepted Answer

In a Type A reorganization, various forms of consideration can be used to acquire a target company, including stock, cash, and non-equity securities. This flexibility is one of the characteristics that distinguish Type A reorganizations from other types of corporate restructurings under the U.S. Internal Revenue Code.

Question 13

Answer: There are different types of Type D reorganizations and one type covers acquisitions while another type covers breakups such as spinoffs.

Accepted Answer

Type D reorganizations under the U.S. Internal Revenue Code include both divisive transactions, such as spin-offs, split-offs, and split-ups, and acquisitive transactions, allowing for a broad range of corporate restructuring activities.

Question 14

In a Type B reorganization in the United States, at least what percent of the payment to the target must be stock in the acquiring company:

Accepted Answer

In a Type B reorganization, at least 80% of the payment to the target company must be in the form of stock in the acquiring company.

Question 15

Research seeking to find the existence of asset basis step-up as a motivating factor for mergers and acquisitions before the Tax Reform Act of 1986, such as research by Auerbach and Reishus, confirmed that asset basis step-up was a significant motivating factor.

Accepted Answer

The answer of Research seeking to find the existence of...

Question 16

The United States just lowered its corporate tax rates and this should greatly reduce, if not eliminate, the demand for tax-based corporate inversion?

Accepted Answer

Lowering corporate tax rates in the U.S. reduces the incentive for companies to relocate their headquarters to countries with lower tax rates, thus decreasing the demand for tax-based corporate inversions.

Question 17

In the United States, up until 2001, there was only one accepted accounting treatment for mergers and acquisitions-pooling.

Accepted Answer

Before 2001, U.S. accounting standards allowed for two methods of accounting for mergers and acquisitions: the pooling of interests method and the purchase method.

Question 18

In the United States, goodwill is amortized over a period not exceeding:

Accepted Answer

The answer of In the United States, goodwill is amortized...

Question 19

In a Type B Reorganization, the stock purchases must be completed over no longer than:

Accepted Answer

In a Type B Reorganization, the stock purchases must be completed over no longer than a 12-month period. This is a requirement under U.S. tax law for a transaction to qualify as a tax-free reorganization.

Question 20

In the United States, a transaction may be partially taxable if the consideration is a combination of stock and cash.

Accepted Answer

In the United States, a transaction can indeed be partially taxable if it involves a combination of stock and cash. The cash portion of the transaction may be subject to taxation, while the stock portion might be treated differently depending on specific tax laws and regulations.

Quiz 16: Tax Issues in Mergers Acquisitions