Johnson Corporation owns a number of automotive parts shops. Don Parks owns 100% stock in an automotive parts shop, Parks Auto, that has been in existence for 40 years and has competed with one of Johnson's branches. Don is considering retiring and would like to sell his business. He has his CPA prepare the following list of assets, which he presents to John Johnson, president of Johnson Corporation.
Assets Adjusted basis FMV
Cash $ 250,000 $ 250,000
Accounts receivable 75,000 70,000
Inventories (LIFO) 600,000 1,750,000
Equipment 200,000 250,000
Building 30,000 285,000
Land 30,000 115,000
Totals $1,185,000 $2,720,000
If Johnson Corporation pursues that acquisition, it will operate the automotive parts shop under its own trade-name in the location Don has used for 40 years. Mr. Johnson has asked you to prepare a summary of the tax consequences of the following three possible transactions: (1) a cash purchase of the noncash assets, (2) a purchase of the stock of Parks Auto from Don with cash and a Johnson Corporation note, and (3) an asset-for-stock reorganization conducted exclusively with Johnson stock. Upon interviewing Don, you obtain the following additional information:
- Parks Auto is a C Corporation formed in 1975 and Don has always been the sole shareholder.
• In addition to the above assets, Parks Auto has Accounts Payable of $200,000. It has depreciated the building under the straight-line method and to date has claimed $100,000 in depreciation. The equipment is Sec. 1245 property for which the corporation has claimed $150,000 in depreciation. The after-tax profits in each of the last three years have exceeded $300,000. Don thinks there is probably some Goodwill value in the corporation. No carryovers or carrybacks of any kind exist.
- Don has a $160,000 adjusted basis in his stock.
Required:
A. Prepare the summary of the tax consequences for the three transactions Mr. Johnson listed. Assume that the anticipated cash purchase price is $2.55 million for the noncash assets and $2.6 million for the stock.