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[ Corporate Tax - Intermediate Sanctions Excise Taxes ]

Case Study #11 - Asset Purchase
Intermediate Sanctions :|: Case Studies of Potential Excess Benefit Transactions

Dr. Marcus Welby is the head of the cardiology department at Ace Academic Medical Center, a world-renowned medical school. As head of the department, Dr. Welby manages a discrete segment of the medical school that represents a substantial portion of its activities, assets, income, and expenses as compared to the medical school as a whole. Dr. Welby was just notified that, due to the death of a wealthy benefactor, the cardiology department would soon be receiving a very large donation that was earmarked to replace much of the medical equipment that was used in the department. This was going to match perfectly with the moving of his department into a new wing of the medical school that was scheduled for completion the following month. Dr. Welby could not be happier. Everything was going so well for Dr. Welby that he was sure that it must be his clean living and Midas touch that were responsible.

As he signed a five million-dollar purchase order for the new medical equipment with his primary supplier, Dr. Welby knew that he was going to have to dispose of all of the old, existing equipment. Virtually all of the old equipment was in perfect working order and very functional, but it did show a little wear, and the new equipment certainly had some new bells and whistles. David Smith, the medical equipment salesman responsible for the five-million-dollar sale, told Dr. Welby that he could bring in a qualified, independent appraiser to appraise the old equipment. David would then make an offer for it based upon the appraisal. David really could not say what the old equipment was worth, but just based upon a general rule of thumb, he thought that it might bring $500,000, maybe more.

Dr. Welby, however, told David that he was one step ahead of him and that he had already lined up a buyer. As fortune would have it, Dr. Welby’s brother, Brent Letsmakeadeal, was just starting a new business that purchases and refurbishes used medical equipment. There seems to be a growing market for refurbished medical equipment, especially in sales to rural facilities and sales overseas. Brent had come by the prior weekend to review the equipment inventory and had concluded that, based upon its age and technology, it was only worth $200,000. Since Brent’s new business was not particularly well funded, he would have to payoff the $200,000 out of future sales, but he was certain that he would be able to turn the inventory quickly and would be able to pay the entire amount within the next six to twelve months.

Dr. Welby knew, with everything going on, that this was really the way to go. The sale would be quick and painless and to someone that he knew and trusted. Any other approach would involve a more formal appraisal that would take time, cost money, and be disruptive. With the pending move, the last thing that was needed was more chaos. Besides, in the whole scheme of life, the dollars involved just could not justify anymore of Dr. Welby’s time or attention. Being quick and decisive on matters like this and putting them in proper perspective is an important quality of effective leaders.

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