Ted purchased equipment and used materials to develop a patent. The development costs were deducted on prior returns. The bases and fair market values of the assets are presented below.

Sarah has made an offer to purchase the assets. Under one plan, she would pay $200,000 now and $400,000 plus interest at 5% (the Federal rate) in one year. Alterna-tively, Ted would incorporate the assets and then sell the stock to Sarah. Incorporating the assets would not be a taxable event to Ted, and his basis in the stock would equal his basis in the assets of $100,000. The corporation€™s basis in the assets would also be $100,000, the same as Ted€™s basis for the stock. Because the corporation would have a basis in the assets of less than the fair market value (and therefore, there would be less depreciation and amortization than with an asset sale by Ted), Sarah would pay $200,000 in the current year but only $350,000, plus interest at 5%, in one year. Assume that Ted€™s marginal tax rate is 35%.
a. What is Ted€™s gain in the year of sale from the installment sale of his assets?
b. Assuming that Ted€™s time value of money is 5%, would he prefer the sale of the assets or the sale of the stock? Why?

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Fair Market Basis Assets Value $ 350,000 (250,000) Equipment $350,000 Cost Less: Depreciation Patent 250,000 -0- $600,000 $ 100,000