Sec. 338 Election. Gator Corporation is considering the acquisition of Bulldog Corporation’s stock in exchange for cash. It is reviewing two options: (1) Gator purchases the assets from Bulldog for $1.4 million or (2) Gator purchases the Bulldog stock for $1 million and makes a Sec. 338 election shortly after the stock purchase. Bulldog has no NOL or capital loss carryovers and has a 21% tax rate. Bulldog’s balance sheet is presented below.

a. What advantages would accrue to Gator if it purchases the assets directly? What disadvantages would accrue to Bulldog if it sells the assets and then liquidates?

b. What advantages would accrue to Gator if it purchases the Bulldog stock for cash and subsequently makes a Sec. 338 election? What advantages would accrue to Bulldog if its shareholders sell the Bulldog stock?

c. How would your answers change if Bulldog in the current year had incurred $250,000 of NOLs, which cannot be carried back?

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Assets Adjusted Basis FMV Liabilities and Equity Атоunt $100,000 140,000 100,000 100,000 200,000 $ 100,000 Short-term debt 200,000 Long-term debt 100,000 Paid-in capital 150,000 Retained earnings 500,000 350,000 $ 200,000 200,000 300,000 700,000 Cash Marketable securities Accounts receivable Inventory (FIFO) Plant and equipment Intangibles -0- Total $640,000 $1,400,000 Total $1,400,000