Answer (A) is correct. Net operating losses (NOLs) are a potential source of tax savings because NOLs can be used to offset an acquiring firms’ taxable income. The combined firm’s capital structure also may allow for increased use of debt financing, which results in tax savings from greater interest reductions. Furthermore, a combination may be the best use of surplus cash from a tax perspective. Dividends received by individual shareholders are fully taxable, whereas the capital gains from a combination are not taxed until the shares are sold. In addition, amounts remitted from the acquired to the acquiring firm are not taxable. However, economies of scale are not a source of tax savings. They are economic savings from joint
operation of companies involved in a business combination.