Discussion
The main difference in a tax-free versus taxable acquisition to the shareholders is that:
(I) In a tax-free acquisition shares are only exchanged, while in a taxable transaction the shares are considered sold and realized capital gains or losses are taxed
(II) In a tax-free acquisition a capital gain and loss are realized and then new shares issued, while in a taxable transaction the assets are revalued, taxed on any capital gains and losses and then shares exchanged
(III) In a tax-free acquisition the shareholders simply take the cash and depart, while in a taxable transaction the shareholders must stay with the new entity
Answer: A
Correct answer: I only
Statement I is the correct distinction: in a tax-free acquisition the shareholders exchange shares and defer any gain until they eventually sell, while in a taxable one they are treated as having sold and are taxed on the gain then. The other two statements invert the treatment or invent a requirement about staying with the merged entity that has nothing to do with the tax position.
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