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Problem 18-15 (a) (LO. 4)

Quentin, Tara and Tito form a business entity with each contributing the following.

Adjusted
Basis		 Fair Market
Value
Quentin: Cash $220,000 $220,000
Tara: Land $55,000 90,000
Tito: Services 60,000

Their ownership percentages will be as follows.

Quentin 40%
Tara 40%
Tito 20%

Tara’s land has a $30,000 mortgage that is assumed by the entity. Tito is an attorney who receives her ownership interest in exchange for legal services. Determine the recognized gain to the owners, the basis for their ownership interests, and the entity’s basis for its assets if the entity is organized as:

If an amount is zero, enter "0".

a. Entity: Partnership.

Recognized
Gain		 Partners'
Basis
Quentin $ $
Tara $ $
Tito $ $
Asset Partnership's
Basis
Cash $
Land $
Organizational Costs $

b. Entity: C corporation.

C corporation
Recognized
Gain		 Shareholders'
Basis
Quentin $ $
Tara $ $
Tito $ $
Asset C Corporation's
Basis
Cash $
Land $
Organizational Costs $

c. Entity: S corporation.

S corporation
Recognized
Gain		 Shareholders'
Basis
Quentin $ $
Tara $ $
Tito $ $
Asset S Corporation's
Basis
Cash $
Land $
Organizational Costs $

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Collen Von
Collen VonLv2
30 Sep 2019

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Adam, Linda, and Mike are considering starting a bakery togetherin Burlington, VT called Vermont Bakes. They have come to youlooking for advice on the advantages and disadvantages of eachbusiness entity. Adam and Linda will each own 40% of the businessand Mike will own 20%. Adam would like to contribute cash of$40,000, Linda will contribute land with an FMV of $60,000 and anadjusted basis of $25,000. Mike will contribute services of$20,000. In addition, Linda receives $20,000 of cash. Adam, Linda& Mike have indicated that they would like to takedistributions of profits from Vermont Bakes each year in additionto compensation. They plan to pay themselves compensation of$45,000 each and they project that Vermont Bakes will have $10,000in profits each year that they would like to distribute based ontheir ownership percentages. The distributions are as follows:Adjusted Basis FMV Adam - Equipment $2,000 $4,000 Linda - Cash$4,000 $4,000 Mike - Cash $2,000 $2,000 In a concise, well-writtenessay (do not use bullet points - write out your answers inparagraph form): • Explain the advantages and disadvantages of eachentity type (C Corporation, S Corporation, Partnership/LLC),including both tax and non-tax considerations we discussed inclass. Include in your discussion an explanation of entities aretaxed at the entity level and which offer flow through taxation.Explain how are income and losses aggregated when they flow throughto the shareholder/member/partner including the effect this has onthe owner's basis in the entity (if any). • Explain the taxtreatment of property contributions from theshareholder/member/partner to each type entity upon formation.including a discussion of the basis the entity would take in thecontributed property and the basis the shareholder/member/ownerwould have in the entity as a result of the contribution. oCalculate Adam, Linda & Mike's basis in their ownershipinterest if they were part of a prearranged plan to incorporateVermont Bakes as a C corporation. Calculate the basis the Ccorporation would take in the property contributed by Adam, Linda& Mike. Calculate the realized and recognized gain to Adam,Linda & Mike on their contribution to the C corporation (ifany). o Calculate Adam, Linda & Mike's basis in their ownershipinterest if they decided to form Vermont Bakes as a partnership.Calculate the basis the partnership would take in the propertycontributed by Adam, Linda & Mike. Calculate the realized andrecognized gain to Adam, Linda & Mike on their contribution tothe partnership (if any). • Explain the tax treatment of cash andproperty distributions/dividends to a shareholder/member/partner ofeach type of entity. Include in your discussion an explanation ofthe concepts of E&P and AAA and the purpose of thosecalculations. o Calculate Adam's basis in the distributed propertyassuming Vermont Bakes is a C Corporation and indicate whether theproperty distribution would result in gain or loss recognition.Assume Adam's basis just prior to the distribution was $1,000.Would your answer change if this was a liquidating distribution? oCalculate Adam's basis in the distributed property assuming VermontBakes is a partnership and indicate whether the propertydistribution would result in gain or loss recognition. AssumeAdam's basis just prior to the distribution was $1,000. Would youranswer change if this was a liquidating distribution? • ProvideVermont Bakes with a recommendation on which entity you think wouldbest suit their needs including the justification for yourrecommendation.

Adam, Linda, and Mike are considering starting a bakery togetherin Burlington, VT called Vermont Bakes. They have come to youlooking for advice on the advantages and disadvantages of eachbusiness entity. Adam and Linda will each own 40% of the businessand Mike will own 20%. Adam would like to contribute cash of$40,000, Linda will contribute land with an FMV of $60,000 and anadjusted basis of $25,000. Mike will contribute services of$20,000. In addition, Linda receives $20,000 of cash. Adam, Linda& Mike have indicated that they would like to takedistributions of profits from Vermont Bakes each year in additionto compensation. They plan to pay themselves compensation of$45,000 each and they project that Vermont Bakes will have $10,000in profits each year that they would like to distribute based ontheir ownership percentages. The distributions are as follows:

Adjusted Basis FMV

Adam - Equipment $2,000 $4,000

Linda - Cash $4,000 $4,000

Mike - Cash $2,000 $2,000

1. Calculate Adam, Linda & Mike's basis in their ownershipinterest if they were part of a prearranged plan to incorporateVermont Bakes as a C corporation. Calculate the basis the Ccorporation would take in the property contributed by Adam, Linda& Mike. Calculate the realized and recognized gain to Adam,Linda & Mike on their contribution to the C corporation (ifany).

2. Calculate Adam, Linda & Mike's basis in their ownershipinterest if they decided to form Vermont Bakes as a partnership.Calculate the basis the partnership would take in the propertycontributed by Adam, Linda & Mike. Calculate the realized andrecognized gain to Adam, Linda & Mike on their contribution tothe partnership (if any).

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Now answer the same questions assuming that this is the organization of a corporation instead of a partnership.

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