Rosie has owned a successful luncheonette for several years. Tired of the long hours Communication Skills and eager to try another way of life, she decides to buy a fishing boat and start a charter service near Key West. The only obstacle is the sale of the following assets of the luncheonette to fund her fishing boat endeavor:

Hank, Rosie’s part-time cook, offers her $175,000 for the luncheonette, which Rosie believes is a fair price. However, she is concerned about the tax consequences of the sale. For example, she wonders how to allocate the sales price among the assets to receive the most advantageous tax results. Write a letter to Rosie about the best way to make the allocations and explaining the tax effects of your recommendations.

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Asset Date Acquired Adjusted Basis Original Cost Building 1/12/86 $ 5,000 $50,000 ($6,600 if S-L depreciation used) Land 1/12/86 10,000 10,000 Equipment 2/9/06 7,800 25,000 Supplies Current year 5,000 5,000