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. Cash Receivables Building Land Total Payables Mortgage* Total FMV $ 10,000 15,000 100,000 225,000 $ 350,000 Adjusted Tax Basis $ 10,000 15,000 50,000 75,000 $ 150,000 $ 18,000 112,000 $ 18,000 112,000 $ 130,000 $ 130,000 Appreciation Problem 08-59 Part c (Static) 50,000 150,000 $ 200,000 * 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. Rather than purchase BLI directly, Amy and Brian will have their corporation, Spartan Tax Services (STS), acquire the business from Ernesto in a tax-deferred Type A merger. Amy and Brian would like Ernesto to continue to run BLI, which he agreed to do if he could obtain an equity interest in STS. As part of the agreement, Amy and Brian propose to pay Ernesto $200,000 plus voting stock in STS worth $200,000. Ernesto will become a 10 percent shareholder in STS after the transaction. c. What amount of gain or loss does Ernesto recognize if the transaction is structured as a Type A merger?
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. Cash Receivables Building Land Total Payables Mortgage* Total FMV $ 10,000 15,000 100,000 225,000 $ 350,000 Adjusted Tax Basis $ 10,000 15,000 50,000 75,000 $ 150,000 $ 18,000 112,000 $ 18,000 112,000 $ 130,000 $ 130,000 Appreciation Problem 08-59 Part c (Static) 50,000 150,000 $ 200,000 * 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. Rather than purchase BLI directly, Amy and Brian will have their corporation, Spartan Tax Services (STS), acquire the business from Ernesto in a tax-deferred Type A merger. Amy and Brian would like Ernesto to continue to run BLI, which he agreed to do if he could obtain an equity interest in STS. As part of the agreement, Amy and Brian propose to pay Ernesto $200,000 plus voting stock in STS worth $200,000. Ernesto will become a 10 percent shareholder in STS after the transaction. c. What amount of gain or loss does Ernesto recognize if the transaction is structured as a Type A merger?
Chapter13: Choice Of Business Entity—general Tax And Nontax Factors/formation
Section: Chapter Questions
Problem 55P
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Transcribed Image Text: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.
Cash
Receivables
Building
Land
Total
Payables
Mortgage*
Total
FMV
$ 10,000
15,000
100,000
225,000
$ 350,000
Adjusted Tax
Basis
$ 10,000
15,000
50,000
75,000
$ 150,000
$ 18,000
112,000
$ 18,000
112,000
$ 130,000 $ 130,000
Appreciation
Problem 08-59 Part c (Static)
50,000
150,000
$ 200,000
* 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.
Rather than purchase BLI directly, Amy and Brian will have their corporation, Spartan Tax Services (STS), acquire the
business from Ernesto in a tax-deferred Type A merger. Amy and Brian would like Ernesto to continue to run BLI, which he
agreed to do if he could obtain an equity interest in STS. As part of the agreement, Amy and Brian propose to pay Ernesto
$200,000 plus voting stock in STS worth $200,000. Ernesto will become a 10 percent shareholder in STS after the
transaction.
c. What amount of gain or loss does Ernesto recognize if the transaction is structured as a Type A merger?
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