You are the founder, sole shareholder, and CEO of a remote-controlled competition race car manufacturer called AC221

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Question:

You are the founder, sole shareholder, and CEO of a remote-controlled competition race car manufacturer called “AC221 Racers” and you are looking to expand your presence in the remote-controlled race car market. An up-and-coming competitor, “Nitro ZXC,” has been gaining momentum because of their signature patented suspension system that allows their cars to better maintain control under high speeds as compared to the current technology used by other manufacturers.

You feel AC221 Racers is in a good position to acquire this up-and-coming competitor and have made a few observations. Nitro ZXC is solely owned by Johnny Nitro, a race car enthusiast with a mechanical engineering background. The assets on Nitro ZXC’s books are minimal as the business was incorporated only three years ago, which include the patent for the new suspension design - which is the very reason AC221 is interested in Nitro ZXC.

In order to secure the patent, AC221 Racers makes three offers to Johnny Nitro, which are as follows:

Option 1- AC221 Racers will purchase 100% of the outstanding stock of Nitro ZXC from Johnny Nitro for $50,000,000 cash. Johnny’s stock basis is $5,000,000. Once AC221 Racers owns the stock of Nitro ZXC, it will liquidate the new subsidiary by transferring the assets and liabilities (including the patent) up into AC221 Racers, and Nitro ZXC will terminate (look at the specifics to see if this transfer is tax-free).
Option 2- AC221 Racers will purchase one asset, the patent, (and is NOT purchasing the company stock) directly from Nitro ZXC for $50,000,000 and then Nitro ZXC will distribute the $50,000,000 to Johnny. Nitro has E&P of $10,000,000.
Option 3- AC221 Racers will exchange $50,000,000 worth of its own AC221 Racers stock in exchange for the assets and liabilities of Nitro ZXC under an IRC 368 “Type C” reorganization.

Required: Choose one of the options listed above and explain the TAX IMPACT OR CONSEQUENCES TO EACH PARTY INVOLVED in the transaction and WHY you think this would be the best option given your research. Specifically, the tax consequences to each of the following taxpayers should be addressed: