Inez butler is the sole shareholder of pelican inc which

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Reference no: EM13593565

Inez Butler is the sole shareholder of Pelican, Inc., which owns car dealerships. Pelican purchases the assets of a Chevrolet dealership. The purchase price of $12 million is allocated to the purchased assets based on the fair market values. This includes $3.5 million that is allocated to goodwill.

In addition to the price of $12 million, Pelican incurred legal fees of $250,000 associated with the purchase. According to an itemized invoice provided by the attorney, 80% of the legal fees relate to the acquisition of inventory. Consequently, Pelican assigned $200,000 of the legal fees to inventory with the balance being capitalized as goodwill. The expectation is that 60% of the $200,000 will become part of cost of goods sold in the current year with the remaining 40% doing so in the following year.

The IRS has concluded that § 1060 limits the amount that may be assigned to the fair market value of the inventory. Therefore, the $200,000 of legal fees cannot be added to the basis of the inventory. Instead, it must be included in goodwill under the residual method.

Who is correct?

Reference no: EM13593565

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