Below you will find two hypothetical business transactions that your "clients" will be entering into. Help your clients structure the business transaction they desire in the most tax efficient manner possible. Describe the most likely tax treatment of the proposed transaction and support with substantive law. Make suggestions about how the transaction may be restructured to get better tax results without deviating too much from the proposed business structure. You are expected to take an aggressive pro-taxpayer position. Justify your position.
Case
Pete, Andre, John and Jimmy are shareholders in ATP, Inc., a New York-based corporation. There are hundreds of shareholders, but each of Pete, Andre, John and Jimmy own 15% of ATP. ATP has been around since 1930s, and made an S election last March, retroactive to January 1, 2015. ATP is a cash basis taxpayer.
ATP makes money from personal appearances by Pete, Andre, John and Jimmy and from sponsorship deals. ATP bills for personal appearances following the event. The sponsors sign long-term contracts and then pay ATP over a period of several months to a few years.
Andre signed up a new sponsor shortly before Christmas. He had the contract with the sponsor dated January 2, 2016 and instructed the sponsor to make the first payment in early 2016. The contract called for payments over five years and could be cancelled with a one-year notice, for a partial refund.
The sponsor, eager to get started on its new promotional campaign wired all the money due under the contract to ATP on December 30, at 4pm. ATP was closed between Christmas and New Year's, and the incoming wire was not discovered until January 2.
ATP will be merging with WATP, Inc., also a New York S corporation with WATP surviving the merger. ATP shareholders will be receiving stock in WATP as their only consideration. ATP has numerous assets, including cash, licensing deals, endorsement deals, valuable sports memorabilia and two stadiums with a few courts. One stadium is used by ATP for its own events. The other stadium is leased out on a triple-net basis, but ATP manages and cleans the common areas, provides security, parking and janitorial services.
WATP is not interested in owning and operating a stadium, and it wants ATP to shed its stadiums prior to the merger. Pete, Andre, John and Jimmy (the individuals) would like to keep at least one of the stadiums and own it personally. The other shareholders of ATP do not care whether they keep or lose the stadiums. Both stadiums have been fully depreciated.
John and Jimmy do not want to be affiliated with WATP. They would like WATP to cash them out on the merger, which WATP has agreed to do. They are willing to accept cash, property or both.
Jimmy has started a new business manufacturing wooden tennis rackets and he has been wildly successful. He has $10 million of sales in the US, and $25 million of sales outside the US. He would like to explore setting up an IC-DISC.
WATP is currently in talks with Roger and Rafa to sell them a 9% stake in WATP. Roger lives in Switzerland and Rafa in Spain. Each of them travels to the U.S. about ten times a year, staying at a swanky hotel. Roger has kids, who live and go to school in Switzerland and is happily married. He does not attend any social events when in the U.S. Rafa is unattached and has made lots of friends in the U.S. who he spends lots of time with.
Roger and Rafa just signed up a large sponsor of their own and they want to make sure that the income from this sponsor will not be taxable in the U.S.