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Our client, Pacific Leisure Corporation is a multistate retailer of outdoor apparel. It has 2 5 retail stores located in the western United States. It

Our client, Pacific Leisure Corporation is a multistate retailer of outdoor apparel. It has
25 retail stores located in the western United States. It is a C corporation with a calendar
year-end. Pacific Leisure is very profitable. It has reported taxable income ranging from
$10 to $12 million in each of its five previous tax years. Its effective tax rate for
financial reporting purposes is 28.5% for its year ended December 31,2023_ Pacific
Leisure's stock is publicly traded.
Larry Smith is the chief financial officer for Pacific Leisure. Larry has been actively
looking for business opportunities to increase the value and stock price of Pacific Leisure.
He is also concerned about the amount of federal and state income taxes paid by the
company. Larry has been investigating opportunities to reduce Pacific Leisure's income
tax liabilities.
Larry was recently contacted by one of Pacific Leisure's suppliers, Rugged Shoe & Boot,
Inc. Rugged has been in the business of manufacturing hiking boots since the early
1960s. Its business has suffered greatly in recent years due to foreign competition.
Rugged cannot compete with its competitors' low-cost foreign labor. Rugged wants tos
know if Pacific Leisure would be interested in acquiring Rugged.
ugged is a closely held C corporation. It is a January 31 fiscal year-end taxpayer.
Rugged provided the following information to Larry pertaining to its estimated assets and
liabilities for its tax year ending January 31,20242 :
Fair Market Value Tax Basis
Cash $350,000$350,000
Trade Receivables 500,000520,000
Fixed Assets, Equipment 950,000950,000
Land/Buildings 11,500,0002,300,000
Misc. Assets 200,000250,000
Trade Payables (625,000)(625,000)
Pension Liabilities (1,800,000)(1,800,000)
Long-term Notes (7,500,000)(7,500,000)
In addition, Rugged has a federal net operating loss (NOL) of $15.5 million as of January
31,2023 z.
Rugged's initial asking price is $4,200,000 for its stock or $15,500,000 for its assets. No
liabilities would be assumed by Pacific Leisure if it the acquisition is structured as an
asset purchase.
Larry is interested in acquiring Rugged for two reasons:
Acquiring Rugged's NOL to shield future taxable income of the combined Pacific
Leisure and Rugged businesses. Larry estimates that the combined businesses.
will generate taxable income in excess of $75 million over the next five years.
Could the NOL shelter the income?
Acquire the real estate owned by Rugged. The real estate consists of its
manufacturing and warehouse locations. The properties are located in prime and
strategic locations in the states of Oregon and New York. There are already a few
commercial developers who have made inquiries to Rugged asking if they would
be willing to sell the real estate. Pacific Leisure may be interested in holding the
real estate as investment property or selling the properties to generate cash.
Larry stated that the Pacific Leisure board of directors is not very interested in continuing
the boot manufacturing business of Rugged. Thus, what the board would like to do is to
acquire Rugged, discontinue the boot manufacturing operations, sell the real estate within
the next several years, and use the NOL to shield future taxable income of the combined
operations.
Larry has several tax issues that he wants our firm to address. The questions are:
What are the tax implications to Pacific Leisure if it purchases the assets of
Rugged?
What are the tax implications to Pacific Leisure if it purchases the stock of
Rugged?
How should the transaction be structured in order for the combined businesses to
utilized Rugged's NOL, if possible?
I have to do a memo explaning the findings, but I dont know where to start. I am not asking to solve it for me but I can not find the answer. I read the IRC 1060 and 381. Can you help me answer it?
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