Question

Cambridge, Inc. is an S corporation. Courtesan, Inc., wants to acquire Cambridge for cash. Cambridge’s shareholders have a tax basis in their stock of $5,000 (they have held the stock for 5 years), and Cambridge has assets with a net tax basis of $5,000 (cost = $7,500, accumulated depreciation = $2,500). Cambridge has no liabilities. Assume that the transaction can be structured one of two ways: Option 1: As a taxable stock acquisition without a Section 338(h)(10) election Option

Answer 1

In a taxable stock acquisition, the shareholders of the S corporation recognize a capital gain or loss based on the cash purchase price minus their tax basis in the stock. Cambridge will not recognize any gain or loss on the sale of its assets.

Step-by-step explanation:

In a taxable stock acquisition without a Section 338(h)(10) election, the buyer will acquire the assets of the S corporation at their fair market value. The shareholders of the S corporation will recognize a capital gain or loss equal to the difference between the sales price and their tax basis in the stock.

In this case, Cambridge's shareholders have a tax basis in their stock of $5,000. If Courtesan, Inc. acquires Cambridge for cash, the shareholders would recognize a capital gain or loss based on the cash purchase price minus their tax basis in the stock.

The net tax basis of Cambridge's assets is $5,000, which means that the fair market value of the assets is equal to their net tax basis. If Courtesan, Inc. acquires Cambridge's assets at their fair market value, Cambridge will not recognize any gain or loss on the sale of its assets.