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.
Adjusted Tax
FMV
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.
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.
Problem 08-59 Part d (Static)
d. What is Ernesto's tax basis in the STS stock he receives in the exchange?
