Assignment
Paul and Jon are partners in a small successful restaurant. They want to expand but need a second location. They think their business has a FMV of $2,000,000 (and has a basis of $500,000 to Paul and a basis of $250,000 to Jon). Jason is a real estate broker and investor. He normally buys real estate and sells it quickly. He is fully licensed as a real estate broker in Texas. Jason has a vacant lot that he paid $1,800,000 several years ago. The FMV is currently $1,000,000.Jason has a big gain from his business this year and would love to offset it somehow but does not know how to do so. Paul and Jon do not want the transaction to cause them any gain this yearPaul and Jon approach Jason about the following business proposition: the restaurant and the land are contributed to a new corporation. Each gets 1/3 of the stock.Jason is not sure he likes that idea and instead offers the following:The corporation will distribute out to Jason a part of the parking lot (of the old location). The FMV is $200,000 and the basis to the corp is $75,000. Jason will contribute the new land for a 5 year note plus 3% annual interest, 15% of the stock and $300,000 in cash. After the first year the corporation will distribute out to Jason another part of the old parking lot (FMV 250,000, basis to the corp of $100,000)If #5 does not work- then Jason would take $750,000 in preferred stock (or options for common stock) and $250,000 in value of the parking lot land (see #5) but would want a fixed 10% dividend, conversation to common rights and a liquidation preference (if preferred stock).Keep in mind Jason wants to own part of the restaurant- he thinks it will be successful.....
Task
What is the income tax consequences idea #4? Support with calculation
What is the income tax consequences idea #5? Support with calculation
What is the income tax consequences idea #6? Support with calculation
Is there a better economic structure that will give the three people the result they desire? If so what it is and defend the idea.
Deliverable: produce a written tax research memo (see ch 1) with appropriate citations.
1. Paul and Jon are partners in a small successfulrestaurant. They want to expand but needa second location. They think theirbusiness has a FMV of $2,000,000 (and has a basis of $500,000 to Paul and abasis of $250,000 to Jon).
2. Jason isa real estate broker and investor. Henormally buys real estate and sells it quickly. He is fully licensed as a real estate brokerin Texas. Jason has a vacant lot thathe paid $1,800,000 several years ago. The FMV is currently $1,000,000.
3. Jason has a big gain from his business this yearand would love to offset it somehow but does not know how to do so. Paul and Jon do not want the transaction tocause them any gain this year
4. Paul and Jon approach Jason about the followingbusiness proposition: the restaurant andthe land are contributed to a new corporation. Each gets 1/3 of the stock.
5. Jason is not sure he likes that idea and insteadoffers the following:
a. The corporation will distribute out to Jason apart of the parking lot (of the old location). The FMV is $200,000 and the basis to the corp is $75,000. Jason will contribute the new land for a 5year note plus 3% annual interest, 15% of the stock and $300,000 in cash.
b. After the first year the corporation willdistribute out to Jason another part of the old parking lot (FMV 250,000, basisto the corp of $100,000)
6. If #5 does not work- then Jason would take$750,000 in preferred stock (or options for common stock) and $250,000 in valueof the parking lot land (see #5) but would want a fixed 10% dividend,conversation to common rights and a liquidation preference (if preferred stock).
7. Keep in mind Jason wants to own part of therestaurant- he thinks it will be successful.....