We can work on AXLE CORPORATION

Axle Corporation was formed in 2010. It is based in Iowa and operates throughout the US Midwest.
Axle is owned by the Miller family, one‐third each by sister Midge (age 38), sister Trudy (age 51), and
brother Jack (age 45). The company controls about $250 million in productive and investment assets,
most of which are located in Iowa.
Axle started out as a wholesale distributor of paint and lacquer products, purchasing gallon‐size and
larger containers of paints from chemical companies and selling them mainly to retailers in its operating
region. Over time, though, the company moved into the manufacturing process as well, purchasing raw
chemicals and processing them at its Iowa plant so as to develop its own line of paints, thinners, and
spray cans. These manufactured products are sold to the big‐box chains, including Ace Hardware and
Lowes, for retail distribution throughout the world.
AXLE CORPORATION
Des Moines
 Distribution division
 Corporate headquarters
Davenport
 Manufacturing division
Both divisions of Axle have been highly profitable, and they are almost recession‐proof. The distribution
division operates near the Des Moines airport and has prime access to the interstate highway system.
There is adjacent vacant land in case Axle wants to expand those
operations. The manufacturing division is located along the river in
Davenport. Corporate headquarters take up an entire office
building in downtown Des Moines.
The distribution operations are not quite a cash business, but the
receivables cycle is very short. Axle’s distribution operations have
developed into the model of efficiency for the industry, with quick
turnaround and a computer‐based structure coordinating the flow
of goods into the company, and the air and truck system of outflow.
The manufacturing division requires a larger capital investment, and
thus it is highly leveraged. There also is exposure to environmental
damage from chemical spills, and to lawsuits concerning the effects of the spray‐can gases on the ozone.
No such damages yet have been incurred by Axle, although one of its west‐coast competitors recently
filed for bankruptcy protection after losing a District Court challenge from a global‐warming activist
group.
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Page 2 of 3
Axle is self‐insured relative to these contingencies. But it has found that the mark‐up that it can build
into the prices it charges customers is so large when Axle controls the product starting with raw
materials, the return on investment cannot be matched in any other way.
Axle has been showing an annual fifteen to twenty percent return on
equity for the past five years. The officer and management group,
longtime employees not related to the Millers, see only future growth in
operations and profits for the next decade, and they all are committed to
Axle and to Iowa for the long‐term.
The balance sheet of the company includes the sum of the sub‐accounts
indicated below.

As a profitable regional operation, Axle regularly receives offers from
investors interested in a takeover. The Millers have resisted all of these
offers so far, but Midge and Jack are interested in funding a “second career” by cashing out of the family
business. Trudy, a Villanova MBA, believes that the company would be better off by downsizing
operations so that the open‐ended exposure to the contingent liabilities can be reduced; she also
maintains that the family could better control the business if Axle remained a smaller operation.
These differences in agenda among the entity and its shareholders have frozen the parties from
considering the takeover offers at any length. But the latest correspondence with the private‐equity
Cooke Group Inc (a closely held C corporation) is almost too tempting to refuse. Cooke wants to acquire
the distribution operations, and not the manufacturing division. Cooke says that it will convey $100
million for the distribution division, but only if the transaction is completed within eighteen months and
the federal income tax consequences are favorable to the group.
You are not Axle’s auditor or regular tax consultant, but your reputation in the Midwest is as the
“Master Deal Maker,” because you bring both a high level to technical tax expertise and a skill in
negotiating an offer that typically is compelling to “both sides” of the transaction.
I
Develop and diagram at least three different approaches for Axle and Cooke to consider, in executing
Cooke’s acquisition. Other advisors will focus on the legal and financial aspects of implementing your
plans, which should take into account both current and future tax liabilities. For this purpose, consider
federal tax consequences only. Ignore the book consequences of creating deferred tax assets and
liabilities.
II
Provide a summary of the tax computations that will result from a carrying‐out of your plans. Include
citations to controlling tax law, and a summary of the strengths and weaknesses of the alternatives that
you develop.

PwC Case Studies in Taxation, © 2018, PwC, LLP
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Sample Solution

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