LO.6 Emily and Freda are negotiating with George to purchase the business he operates in corporate form (Pelican, Inc.). The assets of Pelican, Inc., a C corporation, are as follows:

Asset Basis FMV Cash $ 20,000 $ 20,000 Accounts receivable 50,000 50,000 Inventory 100,000 110,000 Furniture and fixtures* 150,000 170,000 Building** 200,000 250,000 Land 40,000 150,000

* Potential depreciation recapture under § 1245 is $45,000.

** The straight-line method was used to depreciate the building.

The balance in the accumulated depreciation account is $340,000.

George’s basis for the stock of Pelican, Inc., is $560,000. George is in the 35% tax bracket, and Pelican, Inc., is in the 34% tax bracket.

a. Assume that Emily and Freda purchase the stock of Pelican from George and that the purchase price is $908,000. Determine the tax consequences to Emily and Freda, Pelican, and George.

b. Assume that Emily and Freda purchase the assets from Pelican and that the purchase price is $908,000. Determine the tax consequences to Emily and Freda, Pelican, and George.

c. Assume that the purchase price is $550,000 because the fair market value of the building is $150,000 and the fair market value of the land is $50,000. Also assume that no amount is assigned to goodwill. Emily and Freda purchase the stock of Pelican from George. Determine the tax consequences to Emily and Freda, Pelican, and George.