Reference no: EM132036512

Target Corporation is an S corporation with one shareholder, Rhonda White. Acquiring Corporation wants to buy the stock of Target. Target has valuable leases in place that require that the entity stay in existence, and so Acquiring will buy the stock. Acquiring proposes to pay $11,800,000 for the stock of Target. Rhonda has agreed to this offer. Rhonda’s basis in her Target stock is $5,340,000. Rhonda’s tax advisor has told her that the stock sale will produce a long-term capital gain of $6,460,000 that will be taxed at a 20% rate. Rhonda pays a 37% tax on ordinary income. Acquiring now has approached Rhonda and told her that it wants Rhonda to agree to make a Section 338(h)(10) election. This will treat the stock purchase/sale as a deemed purchase/sale of the assets of Target. The tax basis of Target assets is $5,340,000 (the same as Rhonda’s stock basis). However, the Target assets consist of the following: Asset Fair Value Tax Basis Character of Gain if Sold Cash 240,000 240,000 Receivables 860,000 600,000 Ordinary Inventory 2,300,000 1,400,000 Ordinary Equipment 2,700,000 800,000 Ordinary Land 700,000 300,000 Capital Building 4,300,000 2,200,000 Capital Goodwill Capital.