Address the couples question regarding a share sale

Assignment Help Taxation

Reference no: EM132590274

Question 1:

Gary and Grace Keys own and operate Big Signs Inc. (BSI). The couple purchased the company twenty years ago, each contributing $25,000 to buy the shares from the original owner. The original owner paid $2000 in exchange for start-up shares in the company.

Gary and Grace are ready to retire, and have started to look for buyers for the company. The company's balance sheet for the current year is shown in Exhibit I. (Very little has changed on the balance sheet for the past three years. The 24 month period ownership and asset tests have both been met for QSBC purposes.)

The company has reported an average of $300,000 in after-tax profits (in accordance with tax rules) for the past five years. The industry is low-risk and growing rapidly. A 10% return on investment is common in this industry. One prospective buyer has already made an offer to purchase the net assets (less the cash and long-term investment) of the company for $1,000,000.

Exhibit I

Big Signs Inc. - Balance Sheet
Assets		Liabilities
Cash	$ 50,000	Accounts Payable	$25,000
Inventory	25,000	Bank Loan	100,000
Long-term investment	500,000	Total Liabilities	$125,000
Equipment	300,000
Accumulated		Shareholders' Equity
Amortization	(275000)	Common shares	2,000
Building	200,000	Retained Earnings	873,000
Accumulated		Shareholders' Equity	875,000
Amortization	(175,000)
Land	370,000
Goodwill	5,000
	$ 1,000,000		$ 1,000,000

The Keys have estimated the fair market value of the assets, shown in Exhibit II, basing the value of goodwill on the offer they have received.

The Keys have arranged to meet with you for a preliminary discussion of the sale of their business. (Their friends have told them that a share sale might be preferable so they want to ask about this, also.)

Required:

a) Address the $1,000,000 offer the couple has received (at this preliminary stage) based on the current information available. Show calculations to support your answer.

b) Address the couple's question regarding a share sale based on the assets currently in the company. Base your answer on a sales price using the earnings method. (Both shareholders are in a 50% tax bracket and neither has ever used the capital gains deduction.)

Reference no: EM132590274

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