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 shares on a dollar-for-dollar basis.
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 shares on a dollar-for-dollar basis. This means that they are not considered to have received any income or gains from the transaction, and therefore do not owe any taxes on it. This is different from a taxable acquisition, where shareholders may have to pay capital gains taxes on the sale of their shares. However, it is important to note that there may be other tax implications (such as for the target and acquiring companies) in a tax-free acquisition.

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