Taxes and Business Strategy, 7e
by Erickson, Hanlon, Maydew, Shevlin
| ISBN: 9781618536808 | Copyright 2027
Instructor Requests
Welcome to the Seventh Edition of Taxes and Business Strategy.
The book’s focus comes from integrating the tax law with the fundamentals of corporate finance and microeconomics. Through integration with traditional business school topics, the book provides a framework for understanding how taxes affect decision making, asset prices, equilibrium returns, and the financial and operational structure of firms. Relative to legal-based tax books, this text focuses more on the economic consequences of alternative contracting arrangements than on the myriad details and exceptions of the tax laws governing the arrangements. It is not meant to imply that the details of the tax laws are unimportant; they certainly are important. In fact, students new to tax law will find that this text provides them with significant tax legal knowledge in certain key areas where taxes play a big role in decision making and areas that business school graduates are likely to encounter in their careers (e.g., mergers and acquisitions, employee compensation, international tax).
In addition, the book integrates tax with financial accounting by emphasizing differences and tradeoffs between the taxation and the financial accounting of a transaction. Finally, the book presents many general rules about tax law, tax accounting, and financial accounting. The discussion herein is purposefully general to increase user accessibility and readability. However, readers should note that there are exceptions to many of the rules and concepts in this text, and those exceptions can be and often are important.
Target Audience
This book is written for anyone with an interest in learning about tax strategy. We initially wrote the book for MBA students, but it is also appropriate for undergraduate students, masters of accounting or finance students, and doctoral students. More specifically, this book is appropriate for those embarking on (or already in) careers in investment banking, corporate finance, strategy consulting, money management, or venture capital. The book is valuable to accountants and attorneys who want a rigorous framework for thinking about tax strategy and how tax strategy interacts with other aspects of the firm. In addition, those starting their own businesses and even just managing their own finances will find many aspects of this book valuable.
Competitive Advantage
We recognize that executives, entrepreneurs, and finance professionals are typically not aiming to become tax specialists. However, for each of these paths there is a competitive advantage that comes from a solid understanding of (1) the decision contexts that give rise to tax-planning opportunities, (2) how to integrate tax strategy into the bigger picture of corporate decision making, and (3) the dramatic impact that changes in transaction structure can have on after-tax cash flows.
Every top business school program teaches its students the fundamentals of corporate finance, financial statement analysis, valuation, and investments. Every business school graduate knows how to perform a discounted cash flow analysis and apply the net present value (NPV) criterion—these are valuable skills, but not something that differentiates oneself. Business school programs historically have been deficient, however, at teaching their students about the pervasive role taxes play in decision making. Each of the authors has taught taxes and business strategy at the MBA level and often to students in other business school programs as well. Their courses have been, and are, uniformly popular at their respective institutions. Former students have reported back that they possess a competitive advantage over their peers who know little or nothing about tax strategy. The material in this book draws from and builds on the authors’ classroom and business experiences, as well as the experiences of colleagues around the country, and is not duplicated in any other text.
This book provides a general framework for thinking about tax strategy. Readers should consult professional advisors for advice specific to their fact pattern. Tax laws contain many exceptions and grey areas, and are subject to change. The application of tax law to specific fact patterns can vary widely.
Outstanding Author Team
Building on the expertise of Mark Wolfson and Myron Scholes, who received the Nobel Prize for Economics, Merle Erickson, Michelle Hanlon, Ed Maydew, and Terry Shevlin actively teach the tax and business strategy course and provide relevant examples from both classroom and real-world consulting experience.
In-depth Analysis
Analysis and explanatory material help the reader understand, think about, and retain information. A wealth of in-chapter examples, figures, and tables is provided to further illustrate the concepts.
Pedagogy to Reinforce Learning
Summary of Key Points: Each chapter concludes with a summary of the relevant takeaways discussed in the chapter.
Key terms are included in blue font throughout the text, and an end-of-book glossary defines terms for easy reference.
End-of-chapter content includes a variety of
questions, exercises, and tax planning problems.
Changes to the Seventh Edition
- Updating the text to reflect major changes after the Tax Cuts and Jobs Act of 2017 and through the One Big Beautiful Bill Act of 2025
- Updates for changes in retirement accounts, including the SECURE Act and SECURE 2.0 Act
- Discussion of the Corporate Alternative Minimum Tax
- Discussion of changes to international taxation
- Updates for changes in estate and gift tax exemptions
- Tax rates and other rules updated throughout the book
- Updates to current data and statistics
- Adding examples relevant to today’s economy
Teaching Supplements
Solutions Manual: Created by the authors, the solutions manual contains complete solutions to all assignments.
PowerPoint: Created by the authors, the PowerPoint slides outline key elements of each chapter.
| Expand/Collapse All | |
|---|---|
| About the Authors (pg. iii) | |
| Preface (pg. v) | |
| Brief Contents (pg. viii) | |
| Contents (pg. ix) | |
| Chapter 1: Introduction to Tax Strategy (pg. 1-1) | |
| 1.1 Themes of the Book (pg. 1-1) | |
| Taxing Authority as Investment Partner (pg. 1-2) | |
| The Importance of a Contractual Perspective (pg. 1-3) | |
| 1.2 Why Do Tax Rules Influence Before-Tax Rates of Return and Investment Decisions? (pg. 1-4) | |
| Implicit Taxes and Tax Clienteles (pg. 1-5) | |
| Tax Planning as a Tax-Favored Activity (pg. 1-5) | |
| Why Study Tax Planning? (pg. 1-6) | |
| 1.3 Intended Audiences for this Book (pg. 1-7) | |
| Summary of Key Points (pg. 1-9) | |
| Appendix 1.1: Overview of Calculation of U.S. Income Tax Liability (pg. 1-9) | |
| Questions (pg. 1-10) | |
| Exercises (pg. 1-11) | |
| Tax-Planning Problems (pg. 1-11) | |
| References and Additional Readings (pg. 1-12) | |
| Chapter 2: Tax-Planning Fundamentals (pg. 2-1) | |
| 2.1 Types of Income Tax Planning (pg. 2-3) | |
| Converting Income from One Type to Another (pg. 2-3) | |
| Shifting Income from One Pocket to Another (pg. 2-4) | |
| Shifting Income from One Time Period to Another (pg. 2-5) | |
| 2.2 Restrictions on Taxpayer Behavior (pg. 2-6) | |
| Economic Substance, Business Purpose, and Substance over Form (pg. 2-6) | |
| Constructive-Receipt Doctrine (pg. 2-8) | |
| Related-Party versus Arms-Length Contracts (pg. 2-9) | |
| Assignment-of-Income Doctrine (pg. 2-9) | |
| 2.3 The Legislative Process and Sources of Tax Information (pg. 2-10) | |
| Primary and Secondary Authorities (pg. 2-10) | |
| The Legislative Process (pg. 2-10) | |
| Regulations and Revenue Rulings that Result from the Passage of a Tax Act (pg. 2-11) | |
| International Rules Applicable to U.S. Companies (pg. 2-11) | |
| The Role of Judicial Decisions (pg. 2-12) | |
| Secondary Authorities (pg. 2-12) | |
| Summary of Key Points (pg. 2-12) | |
| Appendix 2.1: Sources of Information on Tax Legislation (pg. 2-13) | |
| Appendix 2.2: More Detailed Examples of Tax Planning (pg. 2-14) | |
| Questions (pg. 2-15) | |
| Exercises (pg. 2-16) | |
| Tax-Planning Problems (pg. 2-17) | |
| References and Additional Readings (pg. 2-18) | |
| Chapter 3: Returns on Alternative Savings Vehicles (pg. 3-1) | |
| 3.1 Intertemporally Constant Tax Rates (pg. 3-2) | |
| Review of Compound Interest (pg. 3-3) | |
| Investments in Savings Vehicles I and II (pg. 3-4) | |
| Hybrid Savings Vehicles (pg. 3-6) | |
| Differences in After-Tax Accumulations in Savings Vehicles I and II as a Function of Pretax Rates of (pg. 3-6) | |
| Investments in Savings Vehicle III (pg. 3-6) | |
| Comparison of Savings Vehicles II and III (pg. 3-7) | |
| Investments in Savings Vehicle IV (pg. 3-7) | |
| Investments in Savings Vehicle V (pg. 3-8) | |
| Investments in Savings Vehicle VI (pg. 3-9) | |
| Savings Vehicle VII (pg. 3-10) | |
| Dominance Relations and Summary Comments (pg. 3-11) | |
| 3.2 Changes in Tax Rates Over Time (pg. 3-12) | |
| 3.3 More on Pension Plans (pg. 3-13) | |
| Traditional Deductible IRAs (pg. 3-14) | |
| Nondeductible IRAs (pg. 3-14) | |
| Trump Accounts (pg. 3-14) | |
| Roth IRAs (pg. 3-15) | |
| Comparison of the Deductible and Roth IRAs-New Contributions (pg. 3-15) | |
| Comparison of the Deductible and Roth IRAs-the Conversion Decision (pg. 3-17) | |
| Summary of Key Points (pg. 3-18) | |
| Questions (pg. 3-19) | |
| Exercises (pg. 3-20) | |
| Tax-Planning Problems (pg. 3-21) | |
| References and Additional Readings (pg. 3-23) | |
| Chapter 4: Implicit Taxes and Clienteles, Marginal Tax Rates, and Arbitrage (pg. 4-1) | |
| 4.1 Tax-Favored Status and Implicit Taxes (pg. 4-3) | |
| Computing the Implicit Tax (pg. 4-7) | |
| 4.2 Clienteles (pg. 4-8) | |
| Evidence on the Existence of Implicit Taxes and Clienteles (pg. 4-8) | |
| 4.3 Implicit Taxes and Corporate Tax Burdens (pg. 4-10) | |
| 4.4 Marginal Tax Rates (pg. 4-11) | |
| Scenario 1: TIt < 0, NOLt−1 = 0 (pg. 4-12) | |
| Scenario 2: TIt < 0, NOLt−1 > 0 (pg. 4-12) | |
| Scenario 3: TIt > 0, NOLt−1 = 0 (pg. 4-13) | |
| Scenario 4: TIt > 0, NOLt−1 > 0 (pg. 4-13) | |
| Marginal Tax Rate Estimation under TCJA (pg. 4-14) | |
| Evidence on NOLs for U.S. Corporations (pg. 4-14) | |
| Estimating Corporate Marginal Tax Rates in Practice (pg. 4-15) | |
| Additional Details on Local-Level Tax Rates and Individual-Level Marginal Rates (pg. 4-17) | |
| Average and Effective Tax Rates (pg. 4-17) | |
| 4.5 Tax Arbitrage (pg. 4-18) | |
| Organizational-Form Arbitrage (pg. 4-19) | |
| Restrictions on Organizational-Form Arbitrage (pg. 4-20) | |
| The Effects of Frictions on Organizational-Form Arbitrage (pg. 4-20) | |
| Clientele-Based Arbitrage (pg. 4-20) | |
| Clientele-Based Arbitrage with Investments in Tax-Favored Assets Other than Tax-Exempt Bonds (pg. 4-21) | |
| 4.6 Tax Planning for Low-Marginal-Tax-Rate Firms (pg. 4-22) | |
| 4.7 Adaptability of the Tax Plan (pg. 4-23) | |
| Transaction Costs and Tax Clienteles (pg. 4-23) | |
| Adaptability in Investment and Financing Decisions (pg. 4-24) | |
| 4.8 Reversibility of Tax Plans (pg. 4-24) | |
| 4.9 Insuring against Adverse Changes in Tax Status (pg. 4-24) | |
| 4.10 Tax Planning When a Taxpayer’s Marginal Tax Rate Is Strategy Dependent (pg. 4-26) | |
| Summary of Key Points (pg. 4-27) | |
| Questions (pg. 4-28) | |
| Exercises (pg. 4-30) | |
| Tax-Planning Problems (pg. 4-31) | |
| References and Additional Readings (pg. 4-33) | |
| Chapter 5: Choosing the Optimal Organizational Form (pg. 5-1) | |
| 5.1 Organizational Forms for Producing Goods and Services (pg. 5-3) | |
| Data on Partnerships and LLCs (pg. 5-4) | |
| Data on Corporations (pg. 5-7) | |
| 5.2 Computation of After-Tax Returns To Pass-Through and Non-Pass-Through Forms of Organization (pg. 5-8) | |
| 5.3 Start-Up Enterprises: Decision Factors, Expectations, and Observed Data (pg. 5-10) | |
| 5.4 Changing Preferences for Organizational Forms Induced by Tax-Rule Changes (pg. 5-12) | |
| The Required Before-Tax Rates of Return on Corporate and Partnership Activities (pg. 5-13) | |
| The Required Rate of Return on Stocks in the Presence of Dividends (pg. 5-15) | |
| The Effective Annualized Tax Rate on Shares: ts (pg. 5-16) | |
| Required Before-Tax Rate of Return: Corporations versus Partnerships: R*c (pg. 5-16) | |
| Post TRA 1986 (1987, 1988-1990) (pg. 5-18) | |
| Further Analysis of the 2003 Tax Act (pg. 5-19) | |
| The TCJA, Changing Organizational Form, and Tax Planning (pg. 5-21) | |
| Progressive Personal Income Tax Rates, tp and tcg (pg. 5-21) | |
| 5.5 Other Organizational Forms Through Which to Organize Production Activities (pg. 5-21) | |
| Summary of Key Points (pg. 5-23) | |
| Appendix 5.1: Dividend Imputation in the Corporate Form (pg. 5-24) | |
| Appendix 5.2 (pg. 5-26) | |
| Questions (pg. 5-27) | |
| Exercises (pg. 5-28) | |
| Tax-Planning Problems (pg. 5-28) | |
| References and Additional Readings (pg. 5-30) | |
| Chapter 6: Corporations: Formation, Operation, Capital Structure, and Liquidation (pg. 6-1) | |
| 6.1 Corporate Formation (pg. 6-2) | |
| 6.2 Taxation of Corporate Operations (pg. 6-3) | |
| Book-Tax Differences: Taxable Income versus GAAP Income (pg. 6-4) | |
| Net Operating Losses (pg. 6-4) | |
| Gains and Losses and Tax Basis (pg. 6-5) | |
| Capital Gains and Losses (pg. 6-5) | |
| Section 1231 Assets (pg. 6-5) | |
| Dividends Received Deduction (pg. 6-6) | |
| Consolidated Tax Returns (pg. 6-6) | |
| 6.3 Possible Tax Benefits of Leverage in Firms’ Capital Structures (pg. 6-6) | |
| Theory of the Tax Benefits of Leverage (pg. 6-7) | |
| Empirical Work on the Tax Benefits of Leverage (pg. 6-8) | |
| 6.4 Debt-Equity Hybrids (pg. 6-9) | |
| Traditional Preferred Stock (pg. 6-9) | |
| Trust Preferred Stock (pg. 6-10) | |
| Zero-Coupon Bonds (pg. 6-12) | |
| 6.5 Taxation of Distributions and Share Repurchases (pg. 6-14) | |
| The Concept of Earnings and Profits (pg. 6-15) | |
| Special Kinds of Distributions (pg. 6-16) | |
| Taxation of Share Repurchases (pg. 6-17) | |
| 6.6 Tax Planning Using the Tax Rules for Distributions and Share Repurchases (pg. 6-18) | |
| 6.7 Taxation of Liquidations (pg. 6-18) | |
| Parent-Subsidiary Liquidations (pg. 6-19) | |
| Summary of Key Points (pg. 6-19) | |
| Questions (pg. 6-20) | |
| Exercises (pg. 6-20) | |
| References and Additional Readings (pg. 6-21) | |
| Chapter 7: Nontax Costs of Tax Planning (pg. 7-1) | |
| 7.1 Symmetric Uncertainty, Progressive Tax Rates, and Risk-Taking (pg. 7-3) | |
| R&D and O&G Activities (pg. 7-4) | |
| Progressive Tax Rates and Hedging (pg. 7-6) | |
| 7.2 Tax Planning in the Presence of Risk-Sharing and Hidden-Action Considerations (pg. 7-6) | |
| Contracting in Capital Markets (pg. 7-6) | |
| Contracting in Labor Markets (pg. 7-8) | |
| Conflicts between Risk-Sharing and Tax Minimization (pg. 7-9) | |
| Conflicts between Incentive Contracting and Tax Minimization (pg. 7-9) | |
| 7.3 Tax Planning in the Presence of Hidden-Information Considerations (pg. 7-10) | |
| 7.4 Tax Planning and Organizational Design (pg. 7-11) | |
| 7.5 Accounting for Income Tax Basics and the Importance of Financial Accounting Outcomes in Tax Pla (pg. 7-12) | |
| Accounting for Corporate Income Taxes-Rules and Disclosure Example (pg. 7-14) | |
| Examples of Temporary Differences (pg. 7-17) | |
| Examples of Permanent Differences (pg. 7-19) | |
| Interpreting Income Tax Expense Disclosures (pg. 7-20) | |
| Example Illustrating Corporate Income Tax Disclosures (pg. 7-21) | |
| FIN 48 Accounting for Uncertain Tax Benefits (pg. 7-25) | |
| Example of Actual Corporate Disclosure (pg. 7-27) | |
| Evidence About the Importance of Financial Accounting Income (pg. 7-37) | |
| Book-Tax Trade-off: Income Shifting across Time (pg. 7-37) | |
| Book-Tax Trade-off: LIFO/FIFO Studies (pg. 7-37) | |
| Regulatory Costs (pg. 7-38) | |
| Asset Divestitures (pg. 7-39) | |
| Dollar Estimates of Firms’ Willingness to Forgo Tax Savings (pg. 7-39) | |
| Survey Evidence and Anecdotes of Lobbying Activity (pg. 7-39) | |
| Cash Effective Tax Rates (pg. 7-40) | |
| Implications of Large Book-Tax Differences (pg. 7-42) | |
| Summary of Key Points (pg. 7-43) | |
| Questions (pg. 7-44) | |
| Exercises (pg. 7-50) | |
| Tax-Planning Problems (pg. 7-51) | |
| References and Additional Readings (pg. 7-52) | |
| Chapter 8: Compensation Planning (pg. 8-1) | |
| 8.1 Salary Versus Deferred Compensation (pg. 8-2) | |
| Employer and Employee Tax Rates Both Expected to Fall (pg. 8-5) | |
| 2012 Tax Planning with Deferred Compensation Plans (pg. 8-5) | |
| 2017 TCJA Tax Planning with Deferred Compensation Plans (pg. 8-5) | |
| Summary of Deferred Compensation Plans (pg. 8-6) | |
| 8.2 Salary Versus Fringe Benefits (pg. 8-6) | |
| Employer-Provided Meals (pg. 8-7) | |
| 8.3 Cash Bonus Plans (pg. 8-7) | |
| 8.4 Stock-Based Compensation Components (pg. 8-8) | |
| Restricted Stock (pg. 8-8) | |
| Employee Tax Rates Expected to Rise (pg. 8-11) | |
| Long-Term Performance Awards (pg. 8-12) | |
| Employee Stock Options and Stock Appreciation Rights (pg. 8-13) | |
| Tax Issues Relating to Incentive Stock Options and Nonqualified Stock Options (pg. 8-14) | |
| NQOs versus ISOs (pg. 8-14) | |
| Evidence on the Role of Taxes in the Choice of ISOs (pg. 8-18) | |
| Disqualifying Dispositions of ISOs (pg. 8-18) | |
| The Role of Taxes in the NQO Exercise Decision (pg. 8-20) | |
| Financial Accounting and Tax Comparison of Restricted Stock, Performance Share Awards, Stock Appreci (pg. 8-24) | |
| Other Differences between Restricted Stock and SARs, PSAs, and ESOs (pg. 8-26) | |
| Empirical Evidence on the Usage of the Different Long-Term Compensation Instruments (pg. 8-27) | |
| Compensation in Venture-Capital-Backed Start-Ups (pg. 8-27) | |
| Limits on Deductibility of Executive Compensation (pg. 8-28) | |
| Concluding Remarks (pg. 8-29) | |
| Summary of Key Points (pg. 8-29) | |
| Appendix 8.1: Accounting for the Tax Benefits of Employee Stock Options (pg. 8-30) | |
| Questions (pg. 8-34) | |
| Exercises (pg. 8-35) | |
| Tax-Planning Problems (pg. 8-37) | |
| References and Additional Readings (pg. 8-38) | |
| Chpater 9: Pension and Retirement Planning (pg. 9-1) | |
| 9.1 Types of Pension Plans (pg. 9-1) | |
| 9.2 A Comparison of Salary and Pension Compensation (pg. 9-4) | |
| Rates of Return on Investments in and out of Pension Accounts (pg. 9-6) | |
| Antidiscrimination Rules (pg. 9-6) | |
| 9.3 Deferred Compensation Versus Pension (pg. 9-6) | |
| 9.4 The Stocks-Versus-Bonds Puzzle (pg. 9-8) | |
| 9.5 Does It Pay to Maintain an Overfunded Pension Plan? (pg. 9-11) | |
| Advantages and Disadvantages (pg. 9-11) | |
| Empirical Evidence on Determinants of Defined Benefit Plan Pension Funding (pg. 9-13) | |
| 9.6 Funding Post-Employment Health Care Benefits (pg. 9-14) | |
| The Sweetened Pension Benefit Approach (pg. 9-15) | |
| The Pay-as-You-Go Approach (pg. 9-15) | |
| Other Factors Relevant to the Funding Decision (pg. 9-17) | |
| 9.7 Employee Stock-Ownership Programs (pg. 9-17) | |
| Summary of Key Points (pg. 9-19) | |
| Questions (pg. 9-20) | |
| Exercises (pg. 9-21) | |
| Tax-Planning Problems (pg. 9-21) | |
| References and Additional Readings (pg. 9-24) | |
| Chapter 10: Multinational Tax Planning (pg. 10-1) | |
| 10.1 Fundamental Issues in International Tax (pg. 10-2) | |
| 10.2 Increasing Pressures on Tax Systems Posed by Cross-Border Commerce (pg. 10-2) | |
| 10.3 Overview of International Taxation (pg. 10-4) | |
| Operating as a Branch, Partnership, or a Foreign Subsidiary (pg. 10-4) | |
| The U.S. International Tax System for Corporations (pg. 10-5) | |
| 10.4 Base Erosion and Income Shifting Across Countries (pg. 10-10) | |
| Estimates of Profit Shifting and Revenue Loss (pg. 10-10) | |
| Transfer Pricing (pg. 10-10) | |
| 10.5 Overview of Tariffs, Value Added Taxes, and Hybrid Tax Systems (pg. 10-11) | |
| Tariffs and Their Role in Tax Systems (pg. 10-11) | |
| 10.6 How Taxes Affect the Location and Structure of Investments (pg. 10-13) | |
| Inversion Transactions (pg. 10-14) | |
| Attempts to Encourage Domestic Manufacturing and Domestic Intellectual Property (pg. 10-16) | |
| International Efforts to Encourage Investment (pg. 10-17) | |
| 10.7 Global Attempts at Cooperation (pg. 10-17) | |
| BEPS 1.0: Addressing Base Erosion and Profit Shifting (BEPS) (pg. 10-17) | |
| BEPS 2.0: Pillar 1 and Pillar 2 (pg. 10-17) | |
| 10.8 U.S. Tax Treatment of Foreign Investors (pg. 10-18) | |
| 10.9 Individual Taxation (pg. 10-19) | |
| Individuals Avoiding U.S. Taxation via Foreign Transactions and Locations (pg. 10-19) | |
| Summary of Key Points (pg. 10-20) | |
| Questions (pg. 10-21) | |
| Exercises (pg. 10-22) | |
| References and Additional Readings (pg. 10-24) | |
| Chapter 11: Introduction to Mergers, Acquisitions, and Divestitures (pg. 11-1) | |
| 11.1 Overview of Issues (pg. 11-2) | |
| Reasons for Mergers, Acquisitions, and Divestitures (pg. 11-2) | |
| Types of Mergers, Acquisitions, and Divestitures (pg. 11-2) | |
| 11.2 Major Tax Issues Associated with Mergers, Acquisitions, and Divestitures (pg. 11-3) | |
| Shareholder Tax Liabilities (pg. 11-3) | |
| Effect on Tax Attributes (pg. 11-4) | |
| Target Corporate-Level Tax Effect of the Merger, Acquisition, or Divestiture (pg. 11-5) | |
| Change in the Tax Basis of the Target or Divested Subsidiary Assets (pg. 11-5) | |
| Effect of Leverage on Mergers and Acquisitions (pg. 11-5) | |
| 11.3 Nontax Issues in Mergers, Acquisitions, and Divestitures (pg. 11-6) | |
| 11.4 Five Basic Methods to Acquire a Freestanding C Corporation (pg. 11-6) | |
| 11.5 Four Methods to Divest a Subsidiary or Line of Business (pg. 11-7) | |
| 11.6 Tax Deductibility of Goodwill and Other Intangible Assets Under Section 197 (pg. 11-8) | |
| Summary of Key Points (pg. 11-9) | |
| Questions (pg. 11-9) | |
| References and Additional Readings (pg. 11-10) | |
| Chapter 12: Taxable Acquisitions of Freestanding C Corporations (pg. 12-1) | |
| 12.1 Tax Consequences of Alternative Forms of Corporate Acquisitions (pg. 12-2) | |
| Case 1: Taxable Asset Acquisition Without a Complete Liquidation of the Target (pg. 12-2) | |
| Case 2: Sale of the Target Firm’s Assets Followed by a Liquidation (pg. 12-5) | |
| Case 3: Purchase of the Target’s Stock Followed by a Section 338 Election (pg. 12-6) | |
| Case 4: Purchase of the Target’s Stock Without a Section 338 Election (pg. 12-8) | |
| Tax Consequences (pg. 12-8) | |
| Nontax Consequences (pg. 12-8) | |
| 12.2 Comparison of Taxable Acquisition Structures (pg. 12-9) | |
| Analysis of Acquiring Firm Indifference Price (pg. 12-13) | |
| Summary of Key Points (pg. 12-15) | |
| Questions (pg. 12-15) | |
| Tax-Planning Problems (pg. 12-16) | |
| References and Additional Readings (pg. 12-17) | |
| Chapter 13: Taxable Acquisitions of S Corporations (pg. 13-1) | |
| 13.1 Tax Consequences of Taxable S Corporation Acquisition Structures5 (pg. 13-2) | |
| Case 1: Taxable Asset Acquisition (pg. 13-3) | |
| Case 2: Taxable Stock Acquisition with a Section 338(h)(10) Election (pg. 13-6) | |
| Case 3: Taxable Stock Acquistion without a Section 338(h)(10) Election (pg. 13-8) | |
| Which Structure Is Optimal in the Sale of an S Corporation? (pg. 13-8) | |
| Advanced Analysis: S Corporation Acquisition (pg. 13-11) | |
| 13.2 Comparison of the Sale of Similar S and C Corporations (pg. 13-14) | |
| Tax Consequences for T1 and T2 Shareholders in a Taxable Stock Sale (pg. 13-14) | |
| Valuation Consequences and Issues (pg. 13-19) | |
| Summary of Key Points (pg. 13-19) | |
| Questions (pg. 13-20) | |
| Tax-Planning Problems (pg. 13-20) | |
| References and Additional Readings (pg. 13-22) | |
| Chapter 14: Tax-Free Acquisitions of Freestanding C Corporations (pg. 14-1) | |
| 14.1 Basic Types of Tax-Free Reorganizations (pg. 14-2) | |
| General Requirements for Tax-Free Treatment under Section 368 (pg. 14-2) | |
| 14.2 Section 368 “A” Reorganization: Statutory Merger (pg. 14-2) | |
| Requirements to Qualify for Tax-Free Treatment under Section 368(a)(1)(A) (pg. 14-4) | |
| Tax Consequences of a Section 368 “A” (pg. 14-4) | |
| Nontax Issues Associated with the Section 368 “A” Structure (pg. 14-6) | |
| Triangular Mergers (pg. 14-6) | |
| 14.3 Section 368 “B” Reorganization: Stock-For-Stock Acquisition (pg. 14-7) | |
| Requirements to Qualify for Tax-Free Treatment under Section 368(a)(1)(B) (pg. 14-8) | |
| Tax Consequences of a Section 368 “B” (pg. 14-8) | |
| Nontax Issues Associated with the Section 368 “B” Structure (pg. 14-9) | |
| 14.4 Section 368 “C” Reorganization: Stock-For-Assets Acquisition (pg. 14-9) | |
| Requirements to Qualify for Tax-Free Treatment Under Section 368(a)(1)(C) (pg. 14-9) | |
| Tax Consequences of a Section 368 “C” (pg. 14-10) | |
| 14.5 Tax-Free Reorganizations Under Section 351 (pg. 14-11) | |
| Requirements for Tax-Free Treatment under Section 351 (pg. 14-11) | |
| Tax Consequences of a Section 351 Merger (pg. 14-11) | |
| Comparison of Tax-Free Acquisition Structures (pg. 14-13) | |
| 14.6 Limitations on Target Firm Tax Attributes (pg. 14-14) | |
| How Much Are the Target Firm’s NOLs Worth? (pg. 14-16) | |
| General Limitations on a Firm’s NOLs and NOL Poison Pills (pg. 14-17) | |
| 14.7 Comparison of Taxable and Tax-Free Acquisitions of Freestanding C Corporations (pg. 14-17) | |
| Summary of Key Points (pg. 14-19) | |
| Questions (pg. 14-19) | |
| Tax-Planning Problems (pg. 14-20) | |
| References and Additional Readings (pg. 14-22) | |
| Chapter 15: Tax Planning for Divestitures (pg. 15-1) | |
| 15.1 Subsidiary Sales (pg. 15-2) | |
| Tax-Free Subsidiary Sales (pg. 15-3) | |
| Taxable Subsidiary Sales (pg. 15-4) | |
| Comparison of Taxable Acquisition Structures (pg. 15-8) | |
| Additional Complexities: Subsidiary Sale (pg. 15-12) | |
| Difference between Subsidiary Sales and Sales of Freestanding C Corporations (pg. 15-14) | |
| Valuation Effects (pg. 15-14) | |
| 15.2 Tax-Free Divestiture Methods (pg. 15-16) | |
| Equity Carve-Outs (pg. 15-17) | |
| Tax-Free Spin-Offs (pg. 15-17) | |
| Factors That Influence Divestiture Method Choice (pg. 15-19) | |
| Summary of Key Points (pg. 15-20) | |
| Questions (pg. 15-20) | |
| Tax-Planning Problems (pg. 15-20) | |
| References and Additional Readings (pg. 15-22) | |
| Chapter 16: Estate and Gift Tax Planning (pg. 16-1) | |
| 16.1 Fundamentals of Estate and Gift Taxation (pg. 16-3) | |
| Specifics of the Gift Tax (pg. 16-3) | |
| Specifics of the Estate Tax (pg. 16-4) | |
| Income Tax Consequences of Gifts and Bequests (pg. 16-6) | |
| Generation-Skipping Transfer Tax (pg. 16-6) | |
| 16.2 Estate- and Gift-Planning Strategies (pg. 16-7) | |
| Making Full Use of the Annual Gift Tax Exclusion (pg. 16-7) | |
| Paying for the Kids’ and Grandkids’ Educational and Medical Expenses (pg. 16-7) | |
| Gifting in Excess of the Annual Exclusion (pg. 16-8) | |
| Keeping Life Insurance Out of the Gross Estate (pg. 16-8) | |
| Using Each Spouse’s Lifetime Exclusion: Credit-Shelter or Bypass Trusts (pg. 16-9) | |
| Using the Marriage Deduction to Defer Estate Taxation: QTIPs (pg. 16-9) | |
| Family Limited Partnerships (pg. 16-10) | |
| Transfers of Knowledge, Information, and Services (pg. 16-10) | |
| Charitable Remainder Trusts and Grantor Retained Trusts (pg. 16-11) | |
| 16.3 Monetizing Appreciated Assets Without Triggering Taxation: A Case Study (pg. 16-11) | |
| Taxation of Short Sales (pg. 16-11) | |
| The Strategy (pg. 16-12) | |
| Congress Takes Action (pg. 16-12) | |
| Avoiding the Constructive Sale Rules (pg. 16-13) | |
| 16.4 The Tax Subsidy to Charitable Giving (pg. 16-14) | |
| 16.5 A Model of the Trade-Offs Between Gifting Now Versus by Bequest (pg. 16-14) | |
| The Trade-Offs between Gifting and Losing the Step-Up in Basis on Bequests (pg. 16-16) | |
| Summary of Key Points (pg. 16-17) | |
| Questions (pg. 16-17) | |
| Exercises (pg. 16-18) | |
| Tax-Planning Problems (pg. 16-18) | |
| References and Additional Readings (pg. 16-19) | |
| Glossary (pg. G-1) | |
| Index (pg. I-1) | |
Merle Erickson
Merle Erickson is Professor of Accounting at the Booth School of Business at the University of Chicago.
Professor Erickson teaches “Taxes and Business Strategy” at Booth and has taught the course for more than twenty-five years. He has published numerous articles in a variety of top academic journals, and from 2005-2011, he served as a co-editor of the Journal of Accounting Research.
Over the course of his career, he has consulted on complex GAAP and tax accounting issues (e.g., debt versus equity, accounting for mergers, acquisitions and divestitures [e.g., spin-offs, leveraged partnerships, reverse Morris Trust transactions]) in a variety of contexts (e.g., bankruptcy, various private equity transactions, tax receivable agreements, tax sharing agreements, shareholder disputes, partnership and LLC arrangements, and various types of tax advantaged transactions). His clients have included, among others, the U.S. Department of Justice, the Internal Revenue Service, Fortune 500 companies in various industries, international financial institutions, private equity firms, law firms, accounting firms, and individual taxpayers. He has also assisted corporations with SEC, IRS and whistleblower investigations.
Prior to entering academia, he assisted the U.S. Government in its prosecution of the Lincoln Saving & Loan case. He subsequently published an academic article and teaching case relating to the audit failure associated with the Lincoln Saving & Loan case. That teaching case has been used by the Big 4 to train junior auditors.
He
has been given several awards for his research and teaching. In addition to
teaching graduate students at Chicago Booth, Erickson has taught courses to
Morgan Stanley, Merrill Lynch, General Electric Capital Corporation, Baker
McKenzie, Andersen Consulting, Accenture, CareerBuilder, and the IWI
(Investments and Wealth Institute) among others. He was named one of
BusinessWeek's Outstanding Faculty at the University of Chicago. He is the
faculty director of the Booth Mergers and Acquisitions course for Executives,
and is the also the faculty director of the Booth Certified Private Wealth
Advisor (CPWA) program.
Erickson earned a bachelor's degree in accounting from Rockhurst College in 1987, an MBA in 1989 from Arizona State University, and a PhD in accounting from the University of Arizona in 1996. He joined the Chicago Booth faculty in 1996.
In addition to his scholarly activities,
Erickson is an avid fisherman. His angling pursuits have taken him from the
pristine wilderness lakes of northern Canada to some of the remotest stretches
of the Great Barrier Reef. He received the Angler Award from the Billfish
Foundation in 2003 for catching and releasing the most striped marlin worldwide
that year.
Michelle L. Hanlon
Michelle L. Hanlon is the Howard W. Johnson Professor and Deputy Dean for Faculty and Research at the MIT Sloan School of Management.
Professor Hanlon has taught undergraduates, MBA students, Executive MBA students, and Masters of Finance students. She is the winner of the 2021 Outstanding MBA Teacher Award, the 2020 MIT Teaching with Digital Technology Award, and the 2013 Jamieson Prize for Excellence in Teaching at MIT Sloan.
Professor Hanlon’s research focuses primarily on the intersection of financial accounting and taxation. She has published research studies in all of the top accounting and finance journals and the leading field journals in taxation in accounting and economics. She has won many awards for her research including the Distinguished Contribution to the Accounting Literature Award from the American Accounting Association, being named a Presidential Scholar by the American Accounting Association, and many others. Professor Hanlon has served on several editorial boards and served as one of the senior editors at the Journal of Accounting and Economics for over 15 years. Professor Hanlon is a co-author on two other textbooks: Financial Accounting, entering its seventh edition, and Intermediate Accounting, entering its fourth edition. She has testified in front of the U.S. Senate Committee on Finance and twice to the U.S. House of Representatives Committee on Ways and Means about tax and accounting issues. She served as a U.S. delegate to the American-Swiss Young Leaders Conference in 2010 and worked as an Academic Fellow at the U.S. House Ways and Means Committee in 2015. She served on the Tax Expenditure Commission for the Commonwealth of Massachusetts and serves on the academic advisory board to the International Tax Policy Forum, Washington, DC.
She earned her doctorate degree at the University of Washington. Prior to joining MIT, she was a faculty member at the University of Michigan. She worked at KPMG prior to earning her PhD.
Edward L. Maydew
Ed Maydew is the David E. Hoffman Distinguished Professor of Accounting and the Senior Executive Director of the UNC Tax Center. His teaching and research interests include taxation and accounting, the intersection of the two, and their roles in economic decisions.
Dr. Maydew has served as an editor of The Accounting Review, and on the editorial boards of Journal of Accounting and Economics, Journal of Accounting Research, and Review of Accounting Studies. He has published his research in the leading academic journals in his field, including Journal of Accounting and Economics, Journal of Accounting Research, The Accounting Review, Review of Accounting Studies, Journal of Finance, Journal of Financial Economics, and others. He has consulted with leading firms on complex tax and accounting matters.
Professor Maydew has received awards for excellence in research and teaching, including the Distinguished Contributions to the Accounting Literature Award from the American Accounting Association. He has won the American Taxation Association’s Outstanding Manuscript Award three times. He was named by BusinessWeek as one of the top professors at the University of North Carolina and prior to that, the University of Chicago. At UNC, he has been recognized as an MBA Teaching “All Star” more than ten times and received four Weatherspoon Awards for Excellence in Teaching.
Professor Maydew has been a visiting professor at Cornell University, the University of Iowa, and the Massachusetts Institute of Technology. Before joining UNC, Professor Maydew was on the faculty of the University of Chicago. He received his PhD from the University of Iowa and BBA from Iowa State University. Before earning his PhD, he was employed by a predecessor of PwC in its Chicago office.
Terry Shevlin
Terry Shevlin is a Distinguished Professor Emeritus of accounting at UCI Paul Merage School of Business.
After earning his Ph.D. from Stanford University in 1986, Professor Shevlin served on the University of Washington faculty for over 25 years before joining the University of California, Irvine in 2012, where he remained until his retirement as a UCI Distinguished Professor in 2023. He was inducted in the American Accounting Association’s Accounting Hall of Fame in 2025 and the Australian Accounting Hall of Fame in 2024.
Professor Shevlin was President of the American Accounting Association 2019–2020, AAA President-Elect 2018–1019, AAA Vice President-Research and Publications 2015–2018, and chaired the AAA Publications Committee 2013–2016. He has served as editor on three academic journals: Journal of the American Taxation Association (1996-1999), Senior Editor, The Accounting Review (2002-2005) and Co-editor, Accounting Horizons (2009-2012), and on numerous editorial boards (including the top four accounting journals). He has published 100 manuscripts and three discussions, with over 60 of these appearing in top-tier accounting journals such as Journal of Accounting Research, The Accounting Review, Journal of Accounting and Economics, Contemporary Accounting Research, and Review of Accounting Studies.
Professor Shevlin served as Associate Dean for Research and Doctoral Programs at the Merage School of Business at UCI. He held the Paul Merage Chair in Business Growth at UCI. He held the Paul Pigott/ Paccar Professor of Business Administration from 2004–2012 at Washington. While at Washington, he held various administrative positions, including faculty director of the PhD Program 1998–2006 and Accounting Department Chair from 2006–2012.
Professor Shevlin has been a dedicated mentor, shaping the careers of future accounting scholars. He has chaired 28 doctoral dissertations and served on 32 other Ph.D. committees. His mentees have secured and retained positions at top academic institutions worldwide. His academic descendants have collectively published nearly 400 papers, received over 68,000 citations, and taught accounting to more than 100,000 students globally. Professor Shevlin has received a number of awards for his research and mentoring of PhDs. In addition to his Hall of Fame inductions, he was named the American Accounting Association Outstanding Educator for 2012; the American Taxation Association 2005 Ray M. Sommerfeld Outstanding Tax Educator; and received the American Taxation Association Lifetime Service Award in 2022. He has won the American Taxation Association Tax Manuscript Award four times (in 2017, 2004, 1995, and 1992) and twice won the AAA Competitive Manuscript for young scholars (1990 and 1987). He was awarded the UW Business School Dean’s Faculty Research Award four times. He was awarded the Merage Senior Faculty Research Award in 2021 and 2022.
His research interests are broad and include the effect of taxes on business decisions and asset prices, capital markets-based accounting research, earnings management, research design and statistical significance testing issues. His teaching interests are financial accounting, taxes and business decisions, and empirical research methodology. He has spoken at numerous doctoral consortiums.
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