Amy and Brian were investigating the acquisition of a tax accounting business, Bottom Line Incorporated (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: Note: Leave no answer blank. Enter zero if applicable. Negative amounts should be indicated by a minus sign. FMV Adjusted Tax 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 sales 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. Required: 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? What amount of gain or loss does Ernesto recognize if the transaction is structured as a stock sale to Amy and Brian? 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 were investigating the acquisition of a tax accounting business, Bottom Line Incorporated (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: Note: Leave no answer blank. Enter zero if applicable. Negative amounts should be indicated by a minus sign. FMV Adjusted Tax 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 sales 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. Required: 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? What amount of gain or loss does Ernesto recognize if the transaction is structured as a stock sale to Amy and Brian? What are the tax benefits, if any, to Amy and Brian as a result of structuring the acquisition as a stock sale?
Chapter14: Choice Of Business Entity—operations And Distributions
Section: Chapter Questions
Problem 77EDC
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Question
Amy and Brian were investigating the acquisition of a tax accounting business, Bottom Line Incorporated (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:
Note: Leave no answer blank. Enter zero if applicable. Negative amounts should be indicated by a minus sign.
| FMV | Adjusted Tax 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 sales price was an unrecognized customer list valued at $100,000. The unallocated portion of the purchase price ($80,000) will be recorded as
Assume Ernesto agrees to sell his stock in BLI to Amy and Brian for $400,000.
Required:
- 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?
- What amount of gain or loss does Ernesto recognize if the transaction is structured as a stock sale to Amy and Brian?
- What are the tax benefits, if any, to Amy and Brian as a result of structuring the acquisition as a stock sale?
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