AC312 - Tax Research Memo #2

You provide tax consulting services for Oh Gnome You Didn't, Inc. ("Gnome"), a C-corporation that designs and constructs whimsical gnome gardens for its clientele.On May 25th, 2018, Gnome acquired substantially all the business assets of an unrelated company named You Better Duck, Inc. ("Duck").

Duck bathed and groomed pet ducks prior to Gnome's acquisition of its assets.It is well-known that 75% of duck aficionados own a gnome garden because ducks love to quack up at the funny-looking gnomes, so this was a very strategic business decision for Gnome.The transition was seamless, and no duck was forced to stay unkempt for a moment.

Gnome paid $1,725,000 to acquire Duck's assets, of which $690,000 was allocated to tangible assets and the remaining $1,035,000 of the purchase price related to Duck's intangible assets.Your friend Millie who also happens to be Gnome's CFO has provided the following table for you to reference that itemizes the purchase and computes the 2018 GAAP expense associated with the acquired assets:

Asset Description

Adjusted Basis

Cost Allocation Method - GAAP

2018 GAAP Expense

Duck bathing and grooming equipment

$690,000

Depreciate over 48 months, beginning with June 2018

$690,000/48 months * 7 months in 2018 = 100,625

3-year exclusive supplier agreement with Ducks 'R Us

93,000

Amortize over 36 months, beginning with June 2018

$93,000/36 months * 7 months in 2018 = 18,083

Patent for the Clean "Bill" of Health bathing process invented by Donald, Duck's founder (expires in 16 years)

25,000

Amortize over 192 months, beginning with June 2018

$25,000/192 months * 7 months in 2018 = 911

2-year Employment Agreement with the #1 duck whisperer in the known universe

260,000

Amortize over 24 months, beginning with June 2018

$260,000/24 months * 7 months in 2018 = 75,833

Goodwill

657,000

Not amortizable

Not Applicable

Total Cost of Acquired Assets

$1,725,000

2018 GAAP Depreciation & Amortization Expense for Acquired Assets

$195,452

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AC312 - Tax Research Memo #2 (continued)

Millie would like to know the 2018 tax expense amount that will be reported on Gnome's income tax return with respect to the acquired assets.She has asked you to compute the allowable 2018 tax depreciation and tax amortization expense amounts and would like you to summarize your results using the partially completed table below.

Millie believes that Gnome's 2018 income tax return is likely to be audited by the IRS, so she has requested you document your findings in a professional tax research memo using proper citations to substantiate your cost allocation method conclusions for each type of asset.

Asset Description

Adjusted Basis

Cost Allocation Method - Tax

2018 Tax Expense

Duck bathing and grooming equipment

$690,000

3-year exclusive supplier agreement with Ducks 'R Us

93,000

Patent for the Clean "Bill" of Health bathing process invented by Donald, Duck's founder (expires in 16 years)

25,000

2-year Employment Agreement with the #1 duck whisperer in the known universe

260,000

Goodwill

657,000

Total Cost of Acquired Assets

$1,725,000

2018 Tax Depreciation & Amortization Expense for Acquired Assets

$???