When valuation is important for tax purposes, breakdown by legal entity is key since each has its own tax identity and related tax consequences.
In the case of a U.S. acquisition of a foreign target, it was oftentimes beneficial to make a Section 338(g) election.
Obtaining a valuation from an independent valuation provider is essential to proving that the security has no liquidating value.
In general, the impact of a Sec. 338 election is that a stock acquisition is treated as an asset acquisition.
The impact of the investor model is that it essentially guarantees a return to the intangibles developer for its efforts.
For companies who have not filed for bankruptcy, the insolvency exception is critical.
The valuation of a development-stage company’s common stock is best estimated using the methods in the Practice Aid.
Determining the degree of insolvency is a key step since this will dictate the amount of COD income which may be excluded.
A key tax consideration is whether the acquirer will be entitled to a stepped up tax basis in the assets and thus entitled to future tax deductions.
Canada, like the U.S., imposes a thorough set of documentation requirements, and imposes penalties for failure to comply.