Federal Income Tax 2007

							                         ILLUSTRATIVE COMPARISON OF
             FEDERAL INCOME TAX CONSEQUENCES OF STOCK SALE WITH
               FEDERAL INCOME TAX CONSEQUENCES OF ASSET SALE
                               SEPTEMBER 2007



ASSUMPTIONS:

    •       TargetCo owns two assets – (1) a factory worth $80,000,000, with an adjusted tax
            basis of $80,000,000; and (2) goodwill worth $20,000,000, with an adjusted tax
            basis of zero. TargetCo’s only liability is bank debt in the amount of
            $70,000,000.

    •       TargetCo’s shareholders are U.S. individuals and have an aggregate tax basis of
            $10,000,000 in the stock of TargetCo. Their holding period in their TargetCo
            stock will result in any gain qualifying as long-term capital gain for federal
            income tax purposes.

           The federal tax rate on long-term capital gain recognized by individuals is 15%.
            (State income tax, if any, is disregarded in this illustration.)

           The federal income tax rate applicable to TargetCo is 35%. (State income tax, if
            any, is disregarded in this illustration.)

           TargetCo is a C corporation for federal tax purposes (i.e., it is not an S
            corporation or other entity taxed on a pass through basis).
ALTERNATIVE #1 (stock sale):

      Purchaser buys all of the outstanding stock of TargetCo from TargetCo’s shareholders for
$30,000,000 in cash.



 Gross Amount Realized by Shareholders                                            $30,000,000
  less Adjusted Basis                                                           ($10,000,000)
 Recognized Gain                                                                  $20,000,000
  less Tax (15% rate)                                                             ($3,000,000)
 After-Tax Proceeds to Shareholders                                               $27,000,000
 ($30,000,000-$3,000,000)


       -      There is no corporate level tax.

        -       Purchaser gets carryover tax basis in the factory of $80,000,000 and a carryover
tax basis in the goodwill of zero.




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ALTERNATIVE #2 (asset sale):

       Purchaser buys the factory and the goodwill from TargetCo for $100,000,000.
(Purchaser pays $30,000,000 in cash, and Purchaser assumes TargetCo’s $70,000,000 bank
debt.) TargetCo distributes the net after-tax proceeds of the sale to its shareholders.



 Gross Amount Realized by TargetCo                                          $100,000,000
  less Adjusted Basis                                                       ($80,000,000)
 Recognized Gain                                                             $20,000,000
  less Corporate Level Tax (35%)                                             ($7,000,000)
 After-Tax Proceeds to TargetCo                                              $23,000,000
  ($30,000,000-$7,000,000)


 Gross Amount Distributed by TargetCo to                                     $23,000,000
 Shareholders
  less Adjusted Basis                                                       ($10,000,000)
 Recognized Gain                                                             $13,000,000
  less Tax (15% rate)                                                        ($1,950,000)
 After-Tax Proceeds to Shareholders                                          $21,050,000
  ($23,000,000-$1,950,000)


      -       Shareholders receive $5,950,000 less than they would receive in a stock sale
              (Alternative #1).

      -       Purchaser gets stepped-up basis in goodwill of $20,000,000.




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OBSERVATIONS:

           The advantage to Purchaser of an asset sale (over a stock sale) is equivalent to the
            present value of up to $20,000,000 of extra amortization deductions. These extra
            deductions are available in an asset sale because of the step-up in the basis of the
            goodwill from zero to $20,000,000. (The amortization deductions for goodwill
            are calculated on a straight-line basis over 15 years.)

           Purchaser should discount the amount Purchaser is willing to pay in a stock sale
            (Alternative #1) to reflect the less favorable tax characteristics to Purchaser of a
            stock sale.

           Generally, the discount required by Purchaser to agree to a stock sale (Alternative
            #1) is less than the added cost to Shareholders of an asset sale (Alternative #2).
            Accordingly, if tax considerations were the only considerations, stock sales would
            be the preferred structure where the Shareholders are individuals and TargetCo is
            not an S corporation.

           Taxes other than income taxes (e.g., property taxes, real property transfer taxes,
            and sales and uses taxes) may also be affected by the form of transaction.




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