Effects of Management Buyouts on Corporate Interest and Depreciation Tax Deductions

Abstract

THIS article reports depreciation and interest tax deductions associated with 83 management buyouts completed during 1982-86 and discusses how both the magnitudes of these deductions and the tax savings to be gained from them are affected by the tax environment and economic circumstances of the buyout. Our discussion of the effects of the tax environment includes estimates of the impact on buyout-related deductions of two major pieces of tax legislation: the Economic Recovery Tax Act (ERTA) of 1981 and the Tax Reform Act (TRA) of 1986. These estimates provide evidence on the sensitivity of buyout-related tax subsidies to specific features of the code. Presumably, these sensitivities will help determine trends in future tax-driven restructurings. One focus of our analysis of the tax environment is the alleged tax incentives ERTA provided for acquisitions. Specifically, a transfer of assets enabled both a step-up in the tax basis of assets (also available prior to 1981) and the application of Accelerated Cost Recovery System (ACRS) depreciation to the new basis. Scholes and Wolfson' document