Twenty years ago, Consuela Guererro invented and patented a high-speed burritostuffing machine. Through the years, she has jealously guarded her invention, allowing its use only in El Consuela’s, a chain of restaurants in which she owns 60%of the stock. (Her basis in the stock is $200,000.) On the advice of her accountant, the patent is owned and manufacturing of the burrito stuffer is done exclusively by Consuela’s wholly owned corporation, Stuff, Inc. (Consuela’s basis in the Stuff, Inc., stock is $250,000.)

Consuela has been approached by the Frijoles Company about acquiring her burrito-stuffing operation. Specifically, Frijoles would like to acquire Stuff, Inc.’s patent and burrito-stuffer manufacturing operation. Consuela is tired after spending so many years fighting off the competition, and she agrees to sell to Frijoles. Consuela feels that the patent and manufacturing equipment are worth at least $2,000,000, although they are carried on Stuff, Inc.’s books at their adjusted basis of $100,000. Consuela wants your advice on how best to structure her exit from the burritostuffing business. She intends to retain her ownership interest in El Consuela’s.

a. From Consuela’s point of view, should she sell the burrito-stuffer assets owned by Stuff, Inc., directly to Frijoles, or should she sell her stock in Stuff, Inc.? Consider not only the tax aspects of the alternatives but also how each alternative could influence the proposed $2,000,000 purchase price.

b. Consider part a from Frijoles’s point of view.