Armor Corporation is considering the acquisition of Kennel Corporation's stock in exchange for cash. Two options are under review: (1) Armor purchases the assets from Kennel for $1.8 million or (2) Armor purchases the Kennel stock for $0.9 million and makes a Sec. 338 election shortly after the stockpurchase. Kennel has no NOL or capital loss carryovers. Kennel's balance sheet is presented below.

	Assets		Adjusted Basis		FMV		Liabilities and Equity		Amount
Cash			$110,000		$110,000		Short-term debt		$100,000
Marketable securities			100,000		120,000		Long-term debt		800,000
Accounts receivable			140,000		140,000		Paid-in capital		80,000
Inventory (FIFO)			120,000		180,000		Retained earnings		820,000
Plant and equipment			80,000		700,000
Intangibles			- 0 -		550,000
Total			$550,000		$1,800,000		Total		$1,800,000

a. What advantages would accrue to Armor if it purchases the assets directly? What disadvantages would accrue to Kennel if it sells the assets and then liquidates?

Advantages -Select all that apply:

Assets purchased retain their original basis

Holding period of assets includes Kennel's holding period

No Acquisition of unknown or contingent liabilities

Obtain assets with a tax basis equal to their FMV

Disadvantages - select all that apply

Company taxed on gain from sale, shareholders taxed on liquidation

Gain recognition is deferred under the installment method

Gain recognized on sale is capital in character

Step-up basis on assets

b. What advantages would accrue to Armor if it purchases the Kennel stock for cash and subsequently makes a Sec. 338 election? What advantage would accrue to Kennel if its shareholders sell the Kennel stock?

Advantages -Select all that apply:

Assets purchased retain their original basis

Goodwill, if any, can be amortized

No Acquisition of known or contingent liabilities

Step-up in basis of Kennel's assets

Disadvantages - select all that apply

All Kennel's liabilities (including contingent) transfer to Armour

Company is taxed on gain from sale, shareholders taxed on liquidation

Goodwill can be amortized by the shareholders

c. How would your answers change if Kennel had incurred $150,000 of NOLs in the current year that it cannot carry back in full due to insufficient taxable income in the preceding two years?

The NOL incurred by Kennel in the current year (can reduce/will increase) the cost of making the Sec. 338 election. Assuming a tax rate of 34%, the NOL will (increase/decrease) the tax cost by $_______