#12

Fernando Valentino decided he was tired of working for a living and wanted to own his own business and be his own boss. He had saved some money from his current job and began looking for a business to buy. He worked with an accountant and a lawyer he knew to investigate whether owning a bowling alley might be both profitable and fun. After a year-long search, during which he actually worked at a bowling alley to see how the business worked, Fernando decided after having paid his accountant/lawyer $17,500 in 2015 for the work searching for a bowling alley, and having learned how the business actually worked, he did not want to be the owners of a bowling alley but would prefer to buy an ice cream business. His brother happened to know a friend who was selling his business which included a truck, a building where the ice cream was made, the manufacturing equipment, some intangibles including a customer list (the business not only has an ice cream truck, but sells direct to grocery stores the ice cream that is manufactured in the building), the goodwill of the business and a covenant not to compete from the current owner for 3 years. Below are the values that the current owner and Fernando have separately decided the items are worth. The only thing they agree on is the total purchase price of $5,000,000. Finally, they close the deal on August 1, 2015.

Item	Seller Valuation	Buyer Valuation
Ice Cream Truck	4,000	3,000
Manufacturing Equipment (used)	750,000	850,000
Building	400,000	350,000
Land	300,000	100,000
Customer List	250,000	300,000
Covenant	10,000	250,000
Goodwill	3,286,000	3,147,000
Total	5,000,000	5,000,000

Required: Your first task is to advise Fernando on the best tax answer for him regarding the purchase allocation. Your next task is to determine all of the tax consequences to Fernando of the transactions described in this problem for 2015, including all calculations to show what will be included on his return.