In a tax-free acquisition, the shareholders of the target ﬁrm:
A)receive income that is considered to be tax-exempt.
B)gift their shares to a tax-exempt organization and therefore have no taxable gain.
C)are viewed as having exchanged their shares.
D)sell their shares to a qualifying entity thereby avoiding both income and capital gains
Taxes.
E)sell their shares at cost thereby avoiding the capital gains tax.

Question

Quizplus · Accepted Answer

In a tax-free acquisition, the shareholders of the target firm are viewed as having exchanged their shares rather than selling them. This means that they are not immediately subject to taxes on any gains made from the sale of their shares. However, if they eventually sell the shares they received in the exchange, they may have to pay taxes on any gains at that time.

In a Tax-Free Acquisition, the Shareholders of the Target ﬁRm