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.

Answer 1

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.

If you find this useful, please click thumbs up