Reference no: EM132463611

Phase 1:

4 Individuals want to form the Big Bad Violin Brewing Company

Point 1: Individual 1 - Gives $100,000 for 1,000 shares

Point 2: Individual 2 - Gives $10,000 in cash and a Brew making equipment - FMV $110,000,

Basis $40,000, Debt of $20,000 for 1,000 shares

Point 3: Individual 3 - Gives brewery equipment FMV $120,000, basis $50,000 and receives

$20,000 in cash from the corporation plus 1,000 shares of stock.

Point 4: Individual 4 - Give Warehouse FMV $200,000, basis $70,000, Debt $100,000

Question 1: What are the tax effects to the individual shareholders and corporation. Code Sections?

Phase 2:

The first 2 years of operating expenses are as follows:

Point 1: Year 1 - Gross Sales $750,000, COGS $400,000, Equipment purchase 5 year asset $100,000, Meals and entertainment $10,000, other operating expenses $60,000

Point 2: Year 2 - Gross Sales $1.5 million, COGS $600,000, operating expenses $300,000 and a fine of $50,000. Federal taxes paid $100,000.

Point 3: Distribution of $100,000 - $25,000 is each shareholder

Point 4: Year 3 - Operations, same as year 2 except for the fines.

Also, corporation bought back all of shareholder 1s shares for $170,000 And 600 shares of 2s - Distributed a piece of equipment FMV $100,000, basis $60,000.

Please compute the E&P, Taxable income and the tax effect to each shareholder from these transactions.

Phase 3 - Liquidation

The company sold in year 4 for $1,000,000. What is the gain/loss for:

Point 1: Sold the shares

Point 2: Sold the asset