Skates Corporation ("Skates") was founded in 2008 when Brandon Sanderson, George Martin, and Guy Kay decided to build a skate park for the local community. Skates was formed as a C Corporation for tax purposes. Upon formation, Sanderson, Martin, and Kay individually contributed $15,000 cash and each owned one-third of Skates. The friends, all former skaters themselves, pooled their resources and purchased a plot of land in a previously undeveloped section of Stockton, California. The skate park was built at the end of 2008, and by 2009 Skates Corporation was fully functioning. Originally, Skates' primary source of revenue was the admission fee to enter the skate park. After Skates was able to establish its skate park as an attractive destination for skaters, it began to sell skateboards, gear, and related apparel. Two major events enhanced the success of Skates. The first event occurred in 2010 when the land adjacent to Skates was purchased and developed into a large shopping center, which was completed by 2012. This tripled the average amount of customers that visited the skate park on a daily basis, allowing Skates to improve its park facilities. The second event was the innovative "flexboard" designed by George Martin. From the inception of Skates, George Martin spent considerable time crafting homemade skateboards and longboards to be sold in the shop at the skate park. In 2011, he created a new type of board, which he called the flexboard. The new, streamlined board, which required precise, technical design and a substantial time commitment, quickly caught on among local skating customers. In 2012, George Martin patented his model and began to advertise it at professional skating events. Demand for the flexboard skyrocketed after a professional skateboarder began to use the product later in 2012.

In order to maintain sufficient funding for Skates, the company took out a loan to finance the patent process and cover necessary advertising expenses to promote the product. As of December 2013, sale of flexboards accounted for 65% of Skates' revenue. However, in 2014, revenue for Skates Corporation began to decline. For the first time in three years, attendance at the skate park declined. Furthermore, significant, unanticipated production costs were incurred as the production of the flexboard became the primary business activity. Demand for the board was incredibly high, but the owners were not prepared for the high level of production required to meet the demand. Skates simply did not have the capabilities to produce the number of flexboards required. Several new employees were hired for the exclusive purpose of working on flexboards, but due to the amount of training required, the hiring was not cost beneficial for Skates. Finally, Skates began to increase the amount of money spent on advertising and other marketing. The company had its first year of operating at a loss in 2014 for both book and tax purposes. In order to stem the losses, Martin and Kay proposed closing down the skate park and acquiring a manufacturing center to focus exclusively on the production of flexboards. Sanderson believed the company's main business purpose was to operate a skate park and was hesitant to switch the company's focus to manufacturing flexborads. On October 7th, 2014, a 15-year-old skater was seriously injured while at the skate park. Although the customer signed a liability waiver upon entering the premises, his parents began a lawsuit against Skates, claiming negligence on the part of Skates. Skates' lawyer estimates that Skates has a 65% chance of winning the case. However, if Skates loses the case, their lawyer estimates that Skates will be liable for approximately $300,000 in damages.

Apollo Corporation Apollo Corporation, a C corporation, was incorporated in 2001 as a bicycle manufacturer and distributor. Located in Sacramento, California, Apollo was creating a significant profit within two years. In 2004, Apollo expanded into the dirt bike market and changed its company motto to "Entertainment on Wheels." Apollo saw growth in demand for dirt bikes and other outdoor vehicles and acquired a struggling outdoors company. Apollo rebranded the subsidiary and began to sell its outdoor vehicular inventory which consisted of dirt bikes, four wheelers, and ATVs. From 2005-2010, both branches of Apollo grew at a steady rate. In 2011, though, the primary operation of Apollobicycle salesbegan to slow. Senior leadership began to look for opportunities to revitalize the flagship branch. Terry Pratchett, a senior member of the corporation, was assigned the task of finding alternate product lines for Apollo to market. Apollo always stayed ahead of competitors by offering innovative products, and in early 2014 Pratchett discovered the flexboard created by Skates. Pratchett introduced the flexboard to his superiors, and after discussion, senior leadership decided to pursue the acquisition of the patents and inventory from Skates. In September 2014, Pratchett approached the three co-owners of Skates to see if they would be willing to sell the patented design of the flexboard and their entire inventory. Though a conclusion was not reached, the owners seemed at least open to the idea of selling. Second Meeting On December 13th, 2014, Terry Pratchett met with Brandon Sanderson, George Martin, and Guy Kay in an effort to reach a deal regarding the acquisition. Pratchett proposed acquiring the patents and inventory of Skates for $250,000. The offer was rejected and lengthy, informal negotiations ensued. The primary point of contention was that the owners of Skates desired to sell the entire corporation in a stock-for-cash transaction rather than selling individual assets. Pratchett was opposed, as Apollo's only goal was to acquire the flexboard design. Martin, who was an accounting major in college, mentioned that there could be several benefits for Apollo if they purchased the stock of Skates, including the use of Skates' net operating loss against Apollo's large taxable income for the year. Pratchett consented to considering the deal, although the issues of (1) outstanding debt and (2) possible liability settlements caused him to be hesitant. Martin, Kay, and Sanderson also agreed to consider only selling certain assets, although all three decided that they would immediately distribute the cash among the owners. The parties decided to meet again in one month in a final effort to complete the transaction. Final Offers Below are the two offers that were submitted to each party's lawyers for final negotiation purposes. Apollo Corporation Final Offer: $350,000 cash paid to Skates Corporation for the Flexboard patent and remaining inventory. Skates remains in existence and the initial owners remain the sole owners of Skates. Skates Corporation Final Offer: $550,000 cash paid to Skates Corporation (from Apollo Corporation) for 100% of the outstanding stock of Skates Corporation. Skates is willing to sell the entire company to Apollo for $550,000 cash.

Requirements/Instructions 1. Analyze Apollo's offer to Skates from Skates' perspective (the seller). At a minimum, your analysis should (a) discuss the amount of taxes owed by Skates on the transaction and (b) the after-tax cash that each owner will receive from the transaction. Assume that the proceeds from the transaction will be paid out to each owner as a dividend. 2. Analyze Apollo's offer to Skates from Apollo's perspective (the buyer). At a minimum, your analysis should (a) include the basis of the assets received by Apollo in the transaction and (b) any potential future tax savings from the transaction. 3. Analyze Skates' offer to Apollo from Skates' perspective (the seller). At a minimum, your analysis should (a) discuss the amount of taxes owed by Skates and/or Skates' owners on the transaction and (b) the after-tax cash that each owner will receive from the transaction. Assume that the proceeds from the transaction will be paid out to each owner as a dividend. 4. Analyze Skates' offer to Apollo from Apollo's perspective (the buyer). At a minimum, your analysis should include the basis of the assets received by Apollo in the transaction and (b) any potential future tax savings from the transaction. 5. Any proceeds received by Skates are assumed to be shared equally by the owners. 6. Please use the facts in the case for your analysis. Do not request additional facts. If you believe further information is needed to analyze a particular scenario, please make assumptions and list the assumptions used in your analysis.

Supplementary Information Individual Income Tax Rates: Assume that all shareholders are subject to ordinary income tax rates of 24% and dividend and capital gains tax rates of 15%. Corporate Tax Rate: Assume a corporate tax rate of 21%.