The assets of Bold Corporation have a $1,000,000 basis and a $3,000,000 FMV. Its liabilities are $500,000. Tidel Corporation acquires 80% of the Bold Corporation stock for $2,000,000. What gain is recognized by Bold Corporation if a timely Sec. 338 election is made by Tidel Corporation? What is the total basis of the assets to Bold Corporation following the deemed sale? Assume a 34% corporate tax
rate.
What will be an ideal response?
Bold Corporation will recognize a $2 million gain on the deemed sale. The gain is the difference between the FMV of the assets ($3,000,000) and the corporation's basis in the assets ($1,000,000). Assuming a 34% corporate tax rate, the tax liability on the gain is $680,000 ($2,000,000 × 0.34). The grossed-up basis for the recently purchased stock is $2,500,000 [$2,000,000 × (100%/80%)]. The assets take a total basis of $3,680,000 ($2,500,000 grossed-up basis + $500,000 nontax liabilities + $680,000 taxes). This basis is allocated to the individual assets by using the residual method. Assuming none of the $3,000,000 FMV for the assets given in the facts relates to Class IV assets (e.g., goodwill), $680,000 of the total basis will be allocated to goodwill.
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