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Seller’s stock basis in its subsidiary is $30 and the subsidiary has fair market value of...

Seller’s stock basis in its subsidiary is $30 and the subsidiary has fair market value of $45. The subsidiary has asset A whose basis is $25. Buyer would like to buy asset A; however, Seller prefers stock sale? Why?   How Buyer can induce Seller to sell asset A rather than stock? Specify the method and the amount of inducement, if any.

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Seller prefer stock sale because the amount of the sale or proceeds of the sale is taxed at low rates as compared to asset sale where the proceeds are taxed at high rates. Because of the ownership transfer by the stock sale the liability is shifted to the buyer. Hence, the seller prefers the stock sale over asset sale.

The buyer has to pay higher prices for the asset sale as in asset sale the buyer has to pay high taxes, the higher prices act as a compensation for the tax paid by the seller. The buyer has to find new contracts for the non-union employees who worked on the assets. The amount of the inducement should be higher than the price of asset to compensate the seller for paying taxes.

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