American Taxation Association

JATA abstracts - 2000 Supplement

2000 JATA Conference
Taxes and the Structure of Transactions

Volume 22, Supplement

The Effect of Taxes on Acquisition Price and Transaction Structure
Steve Henning, Wayne Shaw and Toby Stock

The Effects of Goodwill Tax Deductions on the Market for Corporate Acquisitions
Ben Ayers, Craig E. Lefanowicz, and John R. Robinson

Divestiture Structure and Tax Attributes: Evidence from the Omnibus Budget Reconciliation Act of 1993
Connie D. Weaver

Joint Ventures Between Non-Profit and For-Profit Organizations
 Richard Sansing


The Effect of Taxes on Acquisition Price and Transaction Structure

Steve Henning, Wayne Shaw and Toby Stock

Abstract

The purpose of this paper is to investigate the effect of the target's tax status on the structure of taxable corporate acquisitions. Specifically, we examine how the taxes imposed on the parties to the transaction are shared. Our results suggest the acquirer bears target tax costs through higher acquisition prices. In addition, our results also suggest that the acquirer pays little, if anything, to the target for the use of target net operating losses. Finally, we find that the target's tax status affects the transaction structure since targets with higher marginal tax rates are more likely to desire contingent payments in the contract. Top


The Effects of Goodwill Tax Deductions on the Market for Corporate Acquisitions

Ben Ayers, Craig E. Lefanowicz, and John R. Robinson

Abstract

We analyze the effect of the tax deduction for goodwill amortization provided by the Omnibus Budget Reconciliation Act of 1993 (OBRA) on the market for corporate acquisitions. We analyze a sample of taxable corporate acquisitions, including acquisitions of subsidiaries, private firms, and public firms, occurring over the period 1990 through 1996. We assess the impact of the goodwill legislation by (1) quantifying the frequency and size of qualifying acquisitions and comparing these acquisitions with non-qualifying acquisitions pre- and post-OBRA and (2) investigating if and how the goodwill amortization deduction influenced the premium paid for qualifying corporate acquisitions. We estimate a regression of acquisition premiums on target firm characteristics including a proxy for purchased goodwill. We find that acquisitions qualifying for goodwill amortization comprise less than 17 percent of sample taxable corporate acquisitions before OBRA, and this percentage does not increase after the enactment of OBRA. Nonetheless, our regression results indicate that the OBRA goodwill provisions did contribute to a significant increase in acquisition premiums associated with purchased goodwill for qualifying transactions. Thus, rather than operate as a subsidy to acquiring firms, we find that a majority of the tax benefits associated with the goodwill amortization deduction accrues to target firm shareholders. Top


Divestiture Structure and Tax Attributes: Evidence from the Omnibus Budget Reconciliation Act of 1993

Connie D. Weaver

Abstract

Using data from 1991 through 1994, this study investigates the effect of tax provisions on divestiture structure. Specifically, a set of taxable asset and taxable stock sell-offs are analyzed to assess the impact of a tax law change requiring purchased intangibles to be amortized over fifteen years on the structure of these divestitures. The results provide evidence that allowing the amortization of goodwill, a previously non-deductible intangible asset, increases the likelihood of step-up (goodwill-creating) divestitures. However, the likelihood of step-up transactions decreases as a function of the level of other transaction intangibles such as customer lists. Although the incidence of step-up transactions does not increase after the passage of the tax law, the results show that the structure of individual transactions is affected in an offsetting manner as a function of goodwill and other transaction intangibles. This study also provides evidence suggesting that inferences vary depending on how transactions are classified. An additional analysis where structure is determined strictly by the legal form of the divestiture rather than its tax treatment demonstrates the result of misclassifying taxable stock transactions that are taxed as taxable asset transactions (338(h)(10) divestitures). In this analysis, goodwill deductibility is not a significant factor in determining the likelihood of transaction structure. However when the 338(h)(10) divestitures are eliminated from the sample altogether, goodwill deductibility is again significant in explaining the likelihood of divestiture structure as is consistent with the original model. These results suggest that transaction classification is important when examining the effect of tax provisions or attributes on divestiture structure. Top


 Joint Ventures Between Non-Profit and For-Profit Organizations

 Richard Sansing

Abstract

This paper examines the consequences of allowing a non-profit organization to form a joint venture with a for-profit organization. Three tax regimes are considered: prohibiting all such joint ventures; allowing all such joint ventures; and restricting joint ventures between non-profit and for-profit entities to those controlled by the non-profit organization. The paper derives the equilibrium profit sharing rule, output decision, and organizational form choice under each tax regime. Joint ventures can create both private and social benefits by reducing production costs. They can also create private benefits and social costs by reducing competition. Prohibitions or restrictions on joint ventures can either increase or decrease social welfare depending on whether the production cost effect or the competition effect is more important. Top

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