Week 2 Assignment
C:2‑3
Bruce and Bob organize Black LLC on May 10 of the current year. What is the entity’s default tax classification? Are any alternative classification(s) available? If so, (1) how do Bruce and Bob elect the alternative classification(s) and (2) what are the tax consequences of doing so?
If Bruce and Bob are the only owners by default they will be billed as if they were a partnership. If they chose to, they could be taxed as an S Corp. The choice between the two is based on their expected income. If the income is lower than what is reasonable in their profession the partnership tax is preferable while if they are making a high level of income the S Corp election is advantageous. To make the election to be taxed as an S corp they need to fill out and file a form with the IRS for the adjustment. In either case the company will simply pass on profits to the owners to be paid on their personal taxes.
C:2‑54
On March 1 of the current year, Alice, Bob, Carla, and Dick form Bear Corporation and transfer the following items:
Property Transferred
Transferor
Asset
Basis to Transferor
FMV
Number of Common Shares Issued
Alice
Land
$12,000
$30,000
Building
38,000
70,000
400
Mortgage on the land and building
60,000
60,000 Bob
Equipment
25,000
40,000
300
Carla
Van
15,000
10,000
50
Dick
Accounting services
–0–
10,000
100
Alice purchased the land and building several years ago for $12,000 and $50,000, respectively. Alice has claimed straight-line depreciation on the building. Bob also receives a Bear note for $10,000 due in three years. The note bears interest at the prevailing market rate. Bob purchased the equipment three years ago for $50,000. Carla also receives $5,000 cash. Carla purchased the van two years ago for $20,000.
a. Does the transaction satisfy the requirements of Sec. 351?
Yes, the transaction does qualify. Dick’s contribution of accounting services does not qualify as property. The other transferors own 750 of 850 shares (750/850 is 88%) which does meet
Bruce and Bob organize Black LLC on May 10 of the current year. What is the entity’s default tax classification? Are any alternative classification(s) available? If so, (1) how do Bruce and Bob elect the alternative classification(s) and (2) what are the tax consequences of doing so?
If Bruce and Bob are the only owners by default they will be billed as if they were a partnership. If they chose to, they could be taxed as an S Corp. The choice between the two is based on their expected income. If the income is lower than what is reasonable in their profession the partnership tax is preferable while if they are making a high level of income the S Corp election is advantageous. To make the election to be taxed as an S corp they need to fill out and file a form with the IRS for the adjustment. In either case the company will simply pass on profits to the owners to be paid on their personal taxes.
C:2‑54
On March 1 of the current year, Alice, Bob, Carla, and Dick form Bear Corporation and transfer the following items:
Property Transferred
Transferor
Asset
Basis to Transferor
FMV
Number of Common Shares Issued
Alice
Land
$12,000
$30,000
Building
38,000
70,000
400
Mortgage on the land and building
60,000
60,000 Bob
Equipment
25,000
40,000
300
Carla
Van
15,000
10,000
50
Dick
Accounting services
–0–
10,000
100
Alice purchased the land and building several years ago for $12,000 and $50,000, respectively. Alice has claimed straight-line depreciation on the building. Bob also receives a Bear note for $10,000 due in three years. The note bears interest at the prevailing market rate. Bob purchased the equipment three years ago for $50,000. Carla also receives $5,000 cash. Carla purchased the van two years ago for $20,000.
a. Does the transaction satisfy the requirements of Sec. 351?
Yes, the transaction does qualify. Dick’s contribution of accounting services does not qualify as property. The other transferors own 750 of 850 shares (750/850 is 88%) which does meet