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Bearden?s Specialty Produce, Inc.

Description

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Question

Bearden’s Specialty Produce, Inc.

 

 

Your client, Mr. Frank Bearden, owns a

 

business that brokers high-quality fresh fruits and vegetables to restaurants

 

and specialty grocery stores. Frank’s

 

business does not carry any inventories.

 

Frank’s lawyer has urged Franks to incorporate the business, primarily

 

because of the limited shareholder liability associated with corporate

 

status. Frank has operated the business

 

as a cash basis sole proprietorship since 1985, and anticipates incorporating

 

the business on July 1, 2014. A

 

projected balance sheet and income statement for the business as of June 30,

 

2014 are attached.

 

 

I.

 

 

Frank

 

plans to transfer all existing business assets and liabilities to a newly

 

incorporated entity, “Bearden’s Specialty Produce, Inc.” (Produce), in exchange

 

for 1,000 shares of voting common stock.

 

He will serve as President of the corporation, and will be a member of

 

the Board of Directors. Frank wants to

 

adopt an August 31 fiscal year end for Produce because August tends to be the

 

slowest month of the year for the business, and accounts receivables typically

 

are at their lowest level. Frank also

 

intends to continue to use the cash method of accounting.

 

 

Frank’s

 

close friend, Tom Wheeler, has for some time been interested in buying into Frank’s

 

Business. Because Tom will not have

 

access to the necessary cash until October 2014, Frank has agreed to proceed

 

with the incorporation, then simply sell 400 of his new Produce shares for

 

$75,000 to Tom sometime before the end of 2014.

 

 

In

 

discussing the proposed incorporation with you, Frank specifically asks about

 

the amount of any gain he must recognize, both upon the incorporation itself,

 

and upon the subsequent stock sale.

 

Naturally, he is eager to minimize gain to the extent possible. Frank also wants to structure the transaction

 

in such a way as to secure the best tax outcome for Tom Wheeler, as Frank is

 

very eager to have him as a business associate.

 

In addition to addressing these specific concerns, identify any

 

potential tax problems or planning ideas suggested by the above facts. Discuss choice of entity in particular. Be as specific as possible in describing the

 

issues involved, and provide suggestions and/or alternatives you might

 

recommend to minimize risks and maximize opportunities.

 

 

Bearden’s Specialty Produce

 

 

Projected Balance Sheet

 

 

June 30, 2014

 

 

Fair

 

Market

 

 

Assets Tax

 

Basis Value

 

 

Trade

 

accounts receivable $

 

0 $ 88,000

 

 

Office fixtures 63,000 50,000

 

 

acc.depr. (13,000) –

 

 

Trucks 150,000 140,000

 

 

acc.depr. (69,000) –

 

 

$131,000 $278,000

 

 

Liabilities and Net Worth

 

 

Accounts payable (ordinary and

 

 

necessary business expenses) $ 59,000

 

 

Employee salaries payable 3,200

 

 

Notes payable* 100,000

 

 

Net worth 115,800

 

 

$ 278,000

 

 

*incurred on purchase of new trucks

 

 

Bearden’s Specialty Produce

 

 

Projected Income Statement

 

 

For January 1 – June 30, 2014

 

 

Brokerage commissions $195,000

 

 

Deductions:

 

 

Employees’ salaries and wages 33,000

 

 

Rent 13,000

 

 

Depreciation 18,000

 

 

Legal fees for advice on

 

incorporation* 7,000

 

 

Other

 

operating expenses 11,000

 

 

82,000

 

 

Projected

 

2014 Schedule C net income $113,000

 

 

*Frank’s lawyer estimates that

 

additional legal costs for drafting the corporate charter and by-laws and for

 

filling the necessary legal papers with the state of Arkansas will total $8,000. Frank estimates that Produce will also incur

 

accounting fees attributable to the incorporation of $3,200.

 

 

$15

 

Paper#39303 | Written in 07-Dec-2015

Price : $15
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