Amy and Brian were investigating the acquisition of a tax accounting business, Bottom Line Inc. (BLI). As part of their discussions with the sole shareholder of the corporation, Ernesto Young, they examined the company's tax accounting balance sheet. The relevant information is summarized as follows:

		FMV			Adjusted Basis		Appreciation
Cash	$	10,500		$	10,500
Receivables		24,800			24,800
Building		125,500			62,750			62,750
Land		225,750			75,250			150,500
Total	$	386,550		$	173,300			$ 213,250
Payables	$	20,000		$	20,000
Mortgage*		178,500			178,500
Total	$	198,500		$	198,500

* The mortgage is attached to the building and land.

Ernesto was asking for $407,550 for the company. His tax basis in the BLI stock was $110,000. Included in the sales price was an unrecognized customer list valued at $118,000. The unallocated portion of the purchase price ($101,500) will be recorded as goodwill

a.

What amount of gain or loss does BLI recognize if the transaction is structured as a direct asset sale to Amy and Brian? What amount of corporate level tax does BLI pay as a result of the transaction, assuming a tax rate of 34 percent?

b.

What amount of gain or loss does Ernesto recognize if the transaction is structured as a direct asset sale to Amy and Brian, and BLI distributes the after-tax proceeds (computed in question a) to Ernesto in liquidation of his stock?

c-1.

What is the nature of tax benefits to Amy and Brian as a result of structuring the acquisition as a direct asset purchase?

Tax basis in the assets received equal to the assets' fair market value.

No tax benefits.

c-2.	What is the tax basis in the assets received by Amy and Brian?