“Dog Delight must go,” declared Mary Gold, Chief Executive Officer (and majority shareholder) of publicly traded PET Publications, Inc., (PPI) at the quarterly Board of Directors meeting last night. PPI is the industry-leading publisher of electronic magazines for pet owners, and you were at the meeting to brief the board members on sales trends.
“Our shareholders expect a 20% return on sales. All of our titles—Bird World, Feline Fancy, and Reptile World—clear the 20% hurdle. But Dog Delight only makes 10%. Sure, it generates $2 million in net operating losses per year, which partly offsets the $20 million of taxable income from the rest of the orga¬
nization. I think we should sell it to Animal Publications.”
Animal Publications is your major rival, comparable in sales and assets ($30 million and $150 million, respectively) but consisting of twenty smaller publi¬
cations that do not have the brand recognition of PPI’s four publications. Data on public 10K reports indicate that the rival is paying taxes at a 34% rate.
As the firm’s tax advisor, you are asked for your opinion. First, you point out to the board that it should consider that:
• Dog Delight was the flagship publication with a circulation that was double any of the other three magazines

• Advertising revenues have declined significantly over the last three years • If the magazine is sold, it will sell for about a $20 million profit Next, you outline the federal income tax implications of the various ways the transaction could be structured. One of the board members then asks about the impact on payroll. After discussing the direct impact, you are asked to prepare an outline, not to exceed three double-spaced pages, about how payroll taxes can be minimized.