Able Corporation is a manufacturer of electrical lighting fixtures. Able is currently negotiating with Ralph Johnson, the owner of an unincorporated business, to acquire his retail electrical lighting sales business. Johnson€™s assets include the following:

Mr. Johnson thinks that a total purchase price of $1 million in cash is warranted for the business because of its high profitability and strategic locations, and Able has agreed. Despite the fact that both parties agree that the $600,000 excess payment is goodwill Able would prefer that it be designated as a 5-year covenant not to compete so that he can amortize it over a 5-year period.
You are a tax consultant for Able who has been asked to make recommendations as to the structuring of the purchase agreement and the amounts to be assigned to individual assets. Prepare a client memo to reflect your recommendations.

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Assets Adjusted Basis FMV Inventory of electric al fixtures S 30,000 s 50,000 Store buildings 80,000 100,000 100,000 50,000 Land 40,000 Equipment: 7-year recovery period 30,000 Equipment: 5-year recovery period 60,000 100,000 Total S240,000 $400,000