From: Xinxin Shi
RE: Paula Green and Mary Brown (tax year 2012)
Paula Green, a U.S citizen and our client, is preparing to expand her business into landscaping field. Before the expansion, Paula already has already been operating the Green Thumb Nursery whose total assets with a $260,000 adjusted basis and a $500,000 FMV. To avoid the risk of paying unlimited debt, Paula plans to change business form from sole proprietorship into corporation. And Mary Brown, a U.S citizen and the other client, would like to invest $250,000 into this corporation. The Green Thumb Nursery has earned approximately $55,000 per year; both Paula and Mary estimate that the new corporation would incur loss of $50,000 per year for the next two years resulting from the landscaping business. From the third year, the profit would be $80,000 annually. Besides the corporation business, Paula and Mary can earn about $50,000 from other sources.
Now Paula and Mary have the following four options:
a. Green Thumb issues 50 shares of common stock to Paula and 25 shares of common stock to Mary. b. Green Thumb issues 50 shares of common stock to Paula and a $250,000 ten-year bond bearing interest at 8% to Mary. c. Green Thumb issues 40 shares of common stock to Paula plus a $100,000 ten-year bond bearing interest at 6% and 15 shares of common stock to Mary, plus a $100,000 ten-year bond bearing interest at 6%. d. Green Thumb issues 50 shares of common stock to Paula and 25 shares of preferred stock to Mary. The preferred stock is nonparticipating but pays a cumulative preferred dividend at 8% of its $250,000 stated value. Which one would be the best?
Even though there are advantages and disadvantages in all four choices, depending on Paula and Mary’s situation, I would recommendoption b.
Reasoning and Authority
Authority used in analysis: Sec. 1244, Reg.Sec. 1.1361-1, Sec. 351, Sec. 1361,
1. Less complexity....
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