WorldCom Tax Case Study Analysis
Under Comparison of the structure section
Why didn’t WorldCom try to structure the transaction to get a “STEP-UP” in the tax basis of MCI’s assets (given the large difference between the purchase price and the book value of equity of MCI)?
In the acquisition or merger event, it is significantly important that the acquired assets should be stepped-up to their fair market value. As such, the resultant increase in the amortization and depreciation of the assets has the potential to reduce taxes for the company intends to acquire another company in order to pay the acquisition debt as well as providing the acceptable return on the investment. Furthermore, there are number of reasons due to which the company or b buyer of the assets prefers to but the assets rather than the interest of ownership. As the main purpose and objective of the buyer is to generate the healthy cash flow over the period of time from the acquired business. Therefore, the acquirer companies are highly concerned about the limiting exposure to unknown as well as undisclosed liabilities and minimizing tax after the closure of the acquisition deal with the party. Undoubtedly, WorldCom could step up the tax basis of the acquired assets for the purpose of reflecting the purchase price of asset. In doing so, the company would have been able to lower the taxable gains when some assets such as inventories, receivables are converted or sold into cash. In addition to this, it tends to increases the amortization and depreciation deductions for the qualifying assets of the company. Shortly, the step up in the tax basis is advantageous because when the acquirer would sell the assets of the company it would reduce the ultimate tax liability on the sale of the assets(McGuire, 2019).
Despite of the fact that the many buyers prefers to achieve the step up basis in order to ake the cost advantage, there are number of reasons of structuring the transaction to get the step up in the tax basis of the assets of the MCI, the reason behind not structuring the transaction to get the Step-up in the tax basis of the assets of MCI is due to the fact that the company intended to acquire the MCI and structured the transaction to be tax-free reorganization as the main benefit of the tax-free reorganization is to dispose of or acquire the assets of the acquired company without generating the consequences of income tax that would most likely result in straight purchase and sale of those assets.
Along with this, the reasons due to which WorldCom did not try to structure the transaction to get a “STEP-UP” in the tax basis of MCI’s assetscould be; the increasing revenues, improving technological capabilities, achieving economies of scales, improving the financial performance as well as expanding into new geographic locations (Albert B. Ellentuck, 2018). To sum up, the decision of the company to not to structure the transaction to get a “STEP-UP” in the tax basis of MCI’s assets was not wise as when the company acquires the assets of MCI, he would receive the step up in the tax basis which demonstrates that the price the company would pay for the assets of MCI in its new tax basis in the asset. This would be beneficial for the company in a way that the company would be able to enjoy the cost advantage as well as lowering the taxable gains in case when the acquired assets includinginventories and receivables would be sold or converted into the cash.
Conclusion
After taking into consideration the analysis of the tax basis of GTE, British Telecom and WorldCom in the assets and stock of MCI, it is analyzed that the tax basis of the British Telecom in the stock of MCI is higher than the tax basis of the WorldCom in the MCI’s stock. Additionally, the total tax basis of the assets of MCI for GTE, British Telecom and WorldCom includes property and equipment and the goodwill, which in turn makes the accumulated amount of tax basis of $13274.........................................
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