Reference no: EM132985077

Question: Assume that Potbelly Corp (the parent) is a C corp that owns 100% of its subsidiary Subway Corp (the subsidiary), also a C corporation. Potbelly Corp wants to divest POTBELLY this subsidiary, as Subway is no longer a good strategic fit.

SANDWICH SHOP Potbelly Corp had purchased Subway 7 years ago. Currently Potbelly's outside basis in the stock of Subway is $350m and Subway's tax basis in its own assets is $250m (cost basis of $325m net of accumulated depreciation of $75m). Subway does not have any liabilities so its inside basis is also $250m, the same as the tax basis in its assets.

Arby's (the acquirer) is willing to pay $700 million cash for the stock of Subway Corp outright, if no 338(h)(10) election is made.

Assume that any future depreciation deductions Arby's Corp receives from a step-up in basis will accrue over 10 years, and that Arby's discounts future cash flows at 10% per year. The present value factor for a ten-year annuity at 10% is 6.145 (that is, the present value of receiving $1 a year for 10 years at a discount rate of 10% is 6.145).

Cash Sale of Subsidiary

1) How much after-tax cash does Potbelly Corp receive for selling Subway, as the transaction is currently structured?