3. Randall owns all the stock of SilverLane, Inc., a C corporation for which his
ID: 2413881 • Letter: 3
Question
3. Randall owns all the stock of SilverLane, Inc., a C corporation for which his adjusted basis is $225,000. Randall founded SilverLane 12 years ago. The assets and liabilities of SilverLane are recorded as follows.
Assets
Basis
FMV
Cash
$ 15,000
$ 15,000
Accounts receivable
–0–
25,000
Inventory
30,000
35,000
Machinery and equipment*
70,000
90,000
Land
60,000
150,000
$175,000
$315,000
Liabilities
Basis
FMV
Accounts payable
$ 5,000
$ 5,000
Notes payable
10,000
10,000
$15,000
$15,000
?
*Accumulated depreciation of $55,000 has been deducted.
Randall has agreed to sell the business to Mable and they have agreed on a purchase price of $350,000 less any outstanding liabilities. They are both in the 35% tax bracket, and SilverLane is in the 34% tax bracket.
a.
?
Advise Randall on whether the form of the sales transaction should be a stock sale or an asset sale. Explain your reasoning and any computations.
b.
?
Advise Mable on whether the form of the purchase transaction should be a stock purchases or an asset purchase.
Assets
Basis
FMV
Cash
$ 15,000
$ 15,000
Accounts receivable
–0–
25,000
Inventory
30,000
35,000
Machinery and equipment*
70,000
90,000
Land
60,000
150,000
$175,000
$315,000
Liabilities
Basis
FMV
Accounts payable
$ 5,000
$ 5,000
Notes payable
10,000
10,000
$15,000
$15,000
Explanation / Answer
a. For Randall,
As per the facts the agreement seems to sell assets as nothing is mentioned about the common stock of Silver Lane. Also there is considerable difference in the net worth of Silver Lane and consideration for sale, which again points out to Sale of Asset.
b. For mable
On the same grounds as mentioned amount Mable is not investing in stock of Silver Lane instead its buying assets. Thus making it a purchase of Asset transaction.
In such transactions generally, seller prefers sale of stock due to tax savings over sale of assets, and buyer prefers purchase of asset over purchase of investment as he gets depreciation and thus tax benefit over the value of investment.
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