Bailey corp owns a number of automotive parts shops. bill smith owns an automotive parts shop that has been in existence for 40 years and has competed with one of bailey's branches. bill is considering retiring and would like to sell his business. He has his CPA prepare a balance sheet, which he presents to John Bailey, president of Bailey corp and a long-time friend of Bill's.
Assets: Cash; A/R; Inventories(LIFO); equipment; Building; land
adjusted basis: 250,000; 75,000; 600,000; 200,000; 30,000; 30,000
FMV: 250,000; 70,000; 1,750,000; 250,000; 285,000; 115,000
Totals: Adjusted basis = 1,185,000
FMV= 2,720,000
If Bailey corp pursues the acquisition, it will operate the automotive parts shop under its own trade name in the location Bill has used for 40 years. Mr. Bailey has asked you to prepare a summary of the tax consequences of the following three transactions: (1) a cash purchase of the noncash assets, (2) a purchase of the stock of Bill's corp with cash and Bailey notes, and (3) an asset-for-stock reorganization conducted exclusively with Bailey stock. Upon interviewing Bill, you obtain the following additional information: Bill's business is operated as a C corp. Bill has $160,000 adjusted basis in his stock. Accounts payable of $200,000 are outstanding. The corp has depreciated the building under the straight-line method and to date has claimed $100,000 in depreciation. The equipment is Sec. 1245 property for which the corp has claimed $150,000 in depreciation. The after-tax profits in each of the last three years have exceeded $300,000. Bill suspects that some goodwill value exists that is not shown on the balance sheet. No NOL carryovers are available from prior years.
Required: Prepare a memorandum that outlines the tax consequences of each of the three alternative acquisitions. Assume that the anticipated cash purchase price is $2.55 million for the noncash assets and $2.6 million for the stock. Furthermore, assume that the transaction takes place in the current year. How would the acquiring corp report each of the three alternatives under GAAP?