Basket Purchase and Intangibles A tax newsletter stated: "When a business is sold, part of the sales price may be allocated to tangible assets and part to a 'covenant not to compete.' How this allocation is made can have important tax con- sequences to both the buyer and seller." A large law firm, organized as a professional services corporation, purchased a successful local firm for $100,000. The purchase included both tangible assets, which have an average remaining use- ful life of 10 years, and a 3-year covenant not to compete. Suppose the buyer has legally supportable latitude concerning how to allocate this amount, as follows: Covenant Tangible assets Total for two assets Allocation One Allocation Two $ 72,000 28,000 $100,000 $ 48,000 52,000 $100,000 1. For income tax purposes, which allocation would the buyer favor? Why? 2. For shareholder reporting purposes, which allocation would the buyer favor? Why?