Your client, Mr. X, owns and is ready to sell his S corporation. The followinginformation may be

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Question:

Your client, Mr. X, owns and is ready to sell his S corporation. The followinginformation may be relevant to negotiations with prospective buyers:

Inside basis $815
Outside basis $815
Mr. X's ordinary tax rate 45%
Mr. X's capital gains tax rate 22%

a. If Mr. X sells his S corporation stock for $2,000 and does not agree to a 338(h)(10) election, how much cash will X Co. have after paying tax on the sale?

b. How much will Mr. X have to be paid to agree to a 338(h) (10) election? Assumethat 40% of any gain on sale will be taxed as ordinary income and the remainder
as capital gains.

c. What's the most an acquirer would pay X Co. to agree to a 338(h) (10) election?Assume any step-up in basis of acquired X Co. net assets would reduce thetaxable income of the acquirer in equal increments over 4 years, that the acquirerhad a tax rate of 21% and discounted all future cash flows using a 12.5% rate.