The form is 8594 - asset acquisition statement, I put the wrong form number on my original post.

The interest in the LLC (treated as an s-corp) was sold.  The language of the agreement is as follows:  The purchasers unconditionally assumes and agrees to pay, perform, discharge and satisfy and and all liabilities of the company.  There are no monetary values listed in the contract.

I am struggling with a couple of issues: 

1) The outgoing shareholder has a negative basis which was classified as shareholder loans in order to balance the balance sheet.  The shareholder never made whole on the basis issue.

2) Is the correct treatment for the old shareholder to claim the $135k as income through a 1099C?  Does this mean the new shareholders should be able to have an outside basis of $135k to offset the negative retained earnings? Or claim 135k as the sales price + 24k in stock and allocate the $135k as non-deductible goodwill (or to really offset the negative retained earnings).

3) How do the new shareholders overcome the negative retained earnings.It seems like they will be taxed on distributions unless $135k of earnings is retained in the company at all times.