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 $ 23,750 $ 23,750 Receivables 17,900 17,900 Building 118,500 59,250 59,250 Land 259,500 86,500 173,000 Total $ 419,650 $ 187,400 $ 232,250 Payables $ 26,200 $ 26,200 Mortgage* 144,750 144,750 Total $ 170,950 $ 170,950 * The mortgage is attached to the building and land.
Ernesto was asking for $504,950 for the company. His tax basis in the BLI stock was $165,000. Included in the sales price was an unrecognized customer list valued at $170,000. The unallocated portion of the purchase price ($86,250) will be recorded as goodwill. (Negative amounts should be indicated by a minus sign.)
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?Tax basis in the assets received equal to the assets' fair market value. No tax benefits. c-2. What is the tax basis in the assets received by Amy and Brian?