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Two individuals, Madeline and Judy, were investigating the acquisition a business owned by Vertigo Corporation (a C corporation). As part of their discussions with the sole shareholder of the corporation, Scottie (an individual), they examined the company's tax accounting balance sheet. The relevant information is summarized as follows: 

 

                             FMV                  Adjusted Basis 

      Cash            $10,000                     $10,000 

Receivables         15,000                     15,000                                  

   Inventory          20,000                      5,000 

     Building         100,000                    50,000           

       Land            225,000                    75,000 

 

     Total               $370,000              $155,000 

 

  Mortgage          112,000                    112,000

 

Scottie's tax basis in the Vertigo stock is $100,000. Assume all corporations involved in this problem have lots of earnings and profits and have no NOL carryovers. 

 

A. What amount of gain or loss does Vertigo recognize if the transaction is structured as a direct asset sale to Madeline and Judy, with Madeline and Judy paying Vertigo $400,000 in cash and assuming Vertigo's $112,000 mortgage loan? [Note: Madeline and Judy buy all of Vertigo's assets (including the cash).] 

 

B. Under the facts of Part A, what corporate-level tax must Vertigo pay as a result of the transaction? 

 

C. Under the facts of Part A, what amount of gain or loss does Scottie recognize if Vertigo makes a liquidating distribution to him immediately after the sale of assets to Madeline and Judy? 

 

D. What basis does Madeline and Judy take in each of the acquired assets? Show each asset individually. (Don't worry about dividing the basis between the two owners). 

 

E. Assume instead that Scottie sells 100% of his stock in Vertigo to Madeline and Judy for $400,000. What amount of gain or loss does Vertigo recognize if the transaction is structured as a stock sale? 

 

F. Under the facts of Part E, what corporate-level tax must Vertigo pay as a result of the transaction?

 

G. Under the facts of Part E, what amount of gain or loss does Scottie recognize? 

 

H. Under the facts of Part E, what is Vertigo's basis in each of its assets immediately after the transaction? Show each asset individually. 

 

I. Madeline and Judy will have their C corporation, Valdez, Inc., acquire 100% of the stock of Vertigo from Scottie for $315,550 in cash. What amount of gain or loss does Vertigo recognize if the parties make a Section 338 election? 

 

J. Under the facts of Part I, what corporate-level tax must Vertigo pay as a result of the transaction? 

 

K. Under the facts of Part I, what amount of gain or loss does Scottie recognize? 

 

L. Under the facts of Part I, what is Vertigo's basis in each of its assets immediately after the transaction? Show each asset individually. [Note: I know I said in class that the goodwill will often equal the tax the corporation must pay; but that won't be the case here since the problem was designed to come out with nice, "round" numbers.] 

 

M. Madeline and Judy will have their corporation, Valdez, Inc., acquire the business of Vertigo in a Type A merger. As part of the agreement, Madeline and Judy propose to pay $200,000 in cash plus voting stock in Valdez worth $200,000— which Vertigo distributes to Scottie as part of the A merger. Scottie will become a 5% percent shareholder in Valdez after the transaction. Will the continuity of ownership interest (COI) requirements for a Type A merger be met? Explain. 

 

N. Under the facts of Part M, what amount of gain or loss does Vertigo recognize? (Assume the transaction qualifies as an A merger). 

 

O. Under the facts of Part M, what amount of corporate-level tax does Vertigo pay as a result of the transaction? (Assume the transaction qualifies as an A merger.) 

 

P. Under the facts of Part M, what amount of gain or loss does Scottie recognize if the transaction is structured as a Type A merger? (Assume the transaction qualifies as an A merger.) 

 

Q. Under the facts of Part M, what is Scottie's tax basis in the Valdez stock he receives in the exchange? (Assume the transaction qualifies as an A merger.) 

 

R. Under the facts of Part M, what are the tax bases of the former Vertigo assets held by Valdez after the merger? Show each asset individually. (Assume the transaction qualifies as an A merger.)

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