In a tax-free acquisition,the shareholders of the target firm:
A)receive income which 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 transfer their shares to the acquiring company in exchange for shares of the acquiring company, and are not considered to have realized a taxable gain or loss at the time of the transaction. As a result, they do not receive income which is tax-exempt nor do they gift their shares to a tax-exempt organization. They also do not sell their shares to a qualifying entity or at cost to avoid taxes.

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