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 Tax Adjusted Basis Appreciation
Cash $ 10,500 $ 10,500
Receivables 24,800 24,800
Building 125,500 62,750 62,750
Land 225,750 75,250 150,500
Total $ 386,550 $ 173,300 $ 213,250
Payables $ 20,000 $ 20,000
Mortgage* 178,500 178,500
Total $ 198,500 $ 198,500
The mortgage is attached to the building and land.
Ernesto was asking for $407,550 for the company. His tax basis in the BLI stock was $110,000. Included in the sales price was an unrecognized customer list valued at $118,000. The unallocated portion of the purchase price ($101,500) will be recorded as goodwill
a. What amount of gain or loss does BLI recognize if the transaction is structured as a direct asset 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 34 percent?
b. What amount of gain or loss does Ernesto recognize if the transaction is structured as a direct asset sale to Amy and Brian, and BLI distributes the after-tax proceeds (computed in question a) to Ernesto in liquidation of his stock?
c-1. What is the nature of tax benefits to Amy and Brian as a result of structuring the acquisition as a direct asset purchase?
c-2. What is the tax basis in the assets received by Amy and Brian?