Amy and Brian were investigating the acquisition of a taxaccounting business, Bottom Line Inc. (BLI). As part of theirdiscussions with the sole shareholder of the corporation, ErnestoYoung, they examined the company's tax accounting balance sheet.The relevant information is summarized as follows:
| FMV | | Adjusted Basis | | Appreciation |
| Cash | $ | 26,000 | | $ | 26,000 | | | |
| Receivables | | 20,700 | | | 20,700 | | | |
| Building | | 108,500 | | | 54,250 | | | 54,250 |
| Land | | 281,250 | | | 93,750 | | | 187,500 |
| Total | $ | 436,450 | | $ | 194,700 | | $ | 241,750 |
| | | | | | | | |
| Payables | $ | 24,600 | | $ | 24,600 | | | |
| Mortgage* | | 138,750 | | | 138,750 | | | |
| Total | $ | 163,350 | | $ | 163,350 | | | |
|
* The mortgage is attached to the building and land.
Ernesto was asking for $518,350 for the company. His tax basisin the BLI stock was $122,000. Included in the sales price was anunrecognized customer list valued at $162,000. The unallocatedportion of the purchase price ($83,250) will be recorded asgoodwill. (Negative amounts should be indicated by a minussign.)
a. What amount of gain or loss does BLIrecognize if the transaction is structured as a direct asset saleto Amy and Brian? What amount of corporate-level tax does BLI payas a result of the transaction?
b. What amount of gain or loss does Ernestorecognize if the transaction is structured as a direct asset saleto Amy and Brian, and BLI distributes the after-tax proceeds[computed in part (a)] to Ernesto in liquidation of his stock?
- c1. What are the tax benefits, if any, to Amyand Brian as a result of structuring the acquisition as a directasset purchase?
- c2. What is the tax basis in the assetsreceived by Amy and Brian?
