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Bearden?s Specialty Produce, Inc.


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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








Assets Tax


Basis Value





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






Employees’ salaries and wages 33,000



Rent 13,000



Depreciation 18,000



Legal fees for advice on


incorporation* 7,000





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-2015

Price : $15