Question

Amy and Brian were investigating the acquisition of a tax accounting business, Bottom Line Inc. (BLI). As part of their discussions with the sole shareholder of the corporation, Ernesto Young, they examined the company's tax accounting balance sheet. The relevant information is summarized as follows:

	FMV			Adjusted Basis			Appreciation
Cash	$	10,000		$	10,000
Receivables		15,000			15,000
Building		100,000			50,000			50,000
Land		225,000			75,000			150,000
Total	$	350,000		$	150,000		$	200,000
Payables	$	18,000		$	18,000
Mortgage*		112,000			112,000
Total	$	130,000		$	130,000

* The mortgage is attached to the building and land.

Ernesto was asking for $400,000 for the company. His tax basis in the BLI stock was $100,000. Included in the sale price was an unrecognized customer list valued at $100,000. The unallocated portion of the purchase price ($80,000) will be recorded as goodwill.

Assume Ernesto agrees to sell his stock in BLI to Amy and Brian for $400,000.

a. What amount of gain or loss does BLI recognize if the transaction is structured as a stock sale to Amy and Brian? What amount of corporate-level tax does BLI pay as a result of the transaction, assuming a tax rate of 21 percent? (Leave no answer blank. Enter zero if applicable. Negative amounts should be indicated by a minus sign.)

b. What amount of gain or loss does Ernesto recognize if the transaction is structured as a stock sale to Amy and Brian? (Leave no answer blank. Enter zero if applicable. Negative amounts should be indicated by a minus sign.)

What are the tax benefits, if any, to Amy and Brian as a result of structuring the acquisition as a stock sale?

• Amy and Brian get to write-up the tax basis of the assets to fair market value.

• No tax benefits.

Answer 1

A. There is no tax payble by the company itself as its classified as stock type sell and only the seller has to pay the taxes on gains and not the company.

B. Ernesto shows a gain of $220,000 for the business sold and $100,000 for the customer list sold(assuming he aquired it for free) in his personal income tax filling. The business has a net book value of $20,000 and is sold for $300,000.

100000 is of the customer list so the price received above this is the gain for Ernesto.

The only Tax benefit Amy and Brian may have is not having to pay the transfer taxes which they might be liable for had it been a Asset type Sale when transferring the title of the assets.

As they cant step up the tax bassis for the assets aquired in a stock type sale, they will be charging lower depreciation and thus paying higher taxes on a higher reported income.

Please like the solution if satisfied and leave a comment in case of any doubts.

Thankyou.