12. Your client, Mr. X, owns and is ready to sell his S corporation. The following information may be relevant to negotiations with prospective buyers Inside basis $815 Outside basis $815 Mr. Xs ordinary tax rate 45% Mr. Xs capital gains tax rate 22%

a. If Mr. X sells his S corporation stock for $2,000 and does not agree to a 338(h) (10) election, how much cash will X Co. have after paying tax on the sale?

b. How much will Mr. X have to be paid to agree to a 338(h) (10) election? Assume that 40% of any gain on sale will be taxed as ordinary income and the remainder as capital gains.

c. Whats the most an acquirer would pay X Co. to agree to a 338(h) (10) election? Assume any step-up in basis of acquired X Co. net assets would reduce the taxable income of the acquirer in equal increments over 4 years, that the acquirer had a tax rate of 21% and discounted all future cash flows using a 12.5% rate.