If a transaction involves a cash purchase of target stock, the target company's tax cost or basis in the acquired stock or assets is increased or "stepped up" automatically to their fair market value (FMV), which is equal to the purchase price paid by the acquirer.

Question

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In a cash purchase of target stock, it is the acquirer's tax basis in the acquired stock that is stepped up to the purchase price, not the target company's tax basis in its assets. The target company's tax basis in its assets would only be stepped up in certain types of transactions, such as a taxable asset purchase or a merger structured to qualify for asset step-up.

If a Transaction Involves a Cash Purchase of Target Stock