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, which means that they are not taxed on the transaction. This is because the consideration received in the acquisition is in the form of stock or other securities, and the shareholders' basis in the new securities generally equals the basis in the old securities. Therefore, no taxable gain or loss is realized until the shareholders sell the new securities at a later date. Option A is incorrect because the income received by the shareholders is not necessarily tax-exempt. Option B is incorrect because gifting shares to a tax-exempt organization does not necessarily result in no taxable gain. Option D is also incorrect because selling shares to a qualifying entity may result in no capital gains tax, but there may still be income tax consequences. Option E is incorrect because selling shares at cost would not necessarily avoid the capital gains tax.

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