Problem:
T has arranged to exchange his taxi business for a limo service (U's) in order to move to a new city because if T sells his business he will have substantial gain. In order to strike the deal, U insists that T sign a covenant-not-to-compete that U and T value at $25,000.
Balance sheets are:
T's
Autos - $700,000
Computers - 60,000
Covenant - 25,000
Goodwill - 65,000
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Totals $850,000
U's
Autos - $750,000
Computers - 30,000
Covenant -
Goodwill - 60,000
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Totals $840,000
In order to equalize, U will pay T 10,000 cash.
T's bases are:
Autos - $675,000
Computers - $65,000
Covenant & Goodwill - $0
What is the tax effect of this exchange if T accepts?