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.
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.
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.
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
accounts receivable $
0 $ 88,000
Office fixtures 63,000 50,000
acc.depr. (13,000) –
Trucks 150,000 140,000
acc.depr. (69,000) –
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
*incurred on purchase of new trucks
Bearden’s Specialty Produce
Projected Income Statement
For January 1 – June 30, 2014
Brokerage commissions $195,000
Employees’ salaries and wages 33,000
Legal fees for advice on
operating expenses 11,000
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.
Paper#39303 | Written in 07-Dec-2015Price : $15