McGraw-Hill's Taxation of Individuals and Business Entities 3rd Edition by Brian Spilker, Benjamin Ayers, John Robinson, Edmund Outslay, Ronald Worsham, John Barrick, Connie Weaver

Exercise 42

Rather than purchase BLI directly (as in Problems 47 and 48), Amy and Brian will have their corporation, Spartan Tax Services (STS), acquire the business from Ernesto in a tax-deferred Type A merger.Amy and Brian would like Ernesto to continue to run BLI, which he agreed to do if he could obtain an equity interest in STS.As part of the agreement, Amy and Brian propose to pay Ernesto $200,000 plus voting stock in STS worth $200,000.Ernesto will become a 10 percent shareholder in STS after the transaction.a.Will the continuity of ownership interest (COI) requirements for a straight Type A merger be met? Explain.b.What amount of gain or loss does BLI.recognize if the transaction is structured as a Type A merger? What amount of corporate-level tax does BLI pay as a result of the transaction, assuming a tax rate of 34 percent?
c.What amount of gain or loss does Ernesto recognize if the transaction is structured as a Type A merger?
d.What is Ernesto's tax basis in the STS stock he receives in the exchange?
e.What are the tax bases of the BLI assets held by STS after the merger?