Tax and business structure

Tax and business structure

Facts C (S Corporation):

Bob and Lori intend to enter into a business venture together and decided that an S corporation would be a desirable entity choice for federal income tax purposes. The corporation is named Michigan Inc. (“MII”). For newly established MII, Bob intends to contribute Property A with fair market value (“FMV”) of $800 and basis of $300. Lori intends to contribute cash of $800. Bob and Lori are equal owners of MII.

1. Provide Bob’s basis in MII upon contribution (i.e., Year 0) of Property A.
2. Provide Lori’s basis in MII upon contribution (i.e., Year 0) of cash.
3. Provide MII’s basis in Property A and cash immediately after contribution.
4. At the end of Year 1, MII had an operating loss of $500. What would be Bob’s and Lori’s outside basis at the end of Year 1.
5. Assume at the end of Year 1, MII had no operating income/loss. MII would like to distribute cash to Bob and Lori and distribute Property A only to Bob. Will this arrangement work? Why? If yes, provide Bob’s and Lori’s basis in MII at the end of Year 1.

Facts D (S Corporation):

Assume that the facts are the same as noted in Facts C except for the following: Bob intends to contribute Property A with fair market value (“FMV”) of $800 and basis of $300. At that time of contribution, Property A was encumbered with $300 debt financed from Bank A. Lori intends to contribute cash of $800. For purposes of this question, Bob and Lori are equal owners.

6. Provide Bob’s basis in MII upon contribution (i.e., Year 0) of Property A.
7. Provide Lori’s basis in MII upon contribution (i.e., Year 0) of cash.
8. Provide MII’s basis in Property A and cash immediately after contribution.

Facts E (S Corporation):

JS Corporation elected to be treated as an S corporation for federal income tax purposes. For Year 2, JS Corporation distributed Equipment A with FMV of $100 and basis of $400 to one of its 50% shareholders, Lori at the end of year. Immediately prior to the distribution, Lori’s basis in the corporation was $300. JS Corporation’s income or losses for the year was $0.

9. Provide Lori’s outside basis in JS Corporation and inside basis in Equipment A immediately after the distribution.
10. Assuming that JS Corporation was a C corporation for federal income tax purposes, provide Lori’s outside basis in JS Corporation and inside basis in Equipment A immediately after the distribution. Assume that JS Corporation is subject to 35% federal income tax rate and no historical E&P was generated.
11. Assuming that JS Corporation was a partnership for federal income tax purposes, provide Lori’s outside basis in JS partnership and inside basis in Equipment A immediately after the distribution.

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