Shareholder A owns 100% of the shares of Sun Co., and shareholder B owns 100% of the shares of Moon Co.Sun Co.is buying an asset from Moon Co.with a fair market value of $150,000.The tax cost of the asset is $80,000.Neither corporation has loss-carryovers.The arm's-length companies have elected to structure the transfer of the asset in a manner which will defer any taxes at this time.Moon Co.would like to take the maximum note receivable on the transfer.Which of the following is correct?

Question

Quizplus · Accepted Answer

Since Moon Co. wants to take the maximum note receivable, it means that they want to receive the highest amount of money possible. In order to achieve this, the sale of the asset should be equal to the fair market value of $150,000. However, since the tax cost of the asset is $80,000, this means that Sun Co. can only pay $70,000 in non-share consideration (cash or a note payable) to Moon Co. The remaining $80,000 can be paid in share consideration (shares of Sun Co.). Therefore, the correct option is B, with a sale of the asset at $150,000, non-share consideration of $80,000 (note receivable), and share consideration of $70,000.

Shareholder a Owns 100% of the Shares of Sun Co