Bob  and  Carl  transfer  property  to  Stone  Corporation  for  90%  and  10%  of  Stone  stock, respectively. Pursuant to a binding agreement concluded before the transfer,

C:2-62

Bob  and  Carl  transfer  property  to  Stone  Corporation  for  90%  and  10%  of  Stone  stock, respectively. Pursuant to a binding agreement concluded before the transfer, Bob sells half of  his  stock  to  Carl.  Prepare  a  memorandum  for  your  tax  manager  explaining  why  the exchange does or does not meet the Sec. 351 control requirement. Your manager has suggested that, at a minimum, you consult the following authorities:

•  IRC Sec. 351

•  Reg. Sec. 1.351-1

 

 

C:11-66

          One  of  your  wealthy  clients,  Cecile,  invests  $100,000  for  sole  ownership  of  an  electing S  corporation’s  stock.  The  corporation  is  in  the  process  of  developing  a  new  food product.  Cecile  anticipates  that  the  new  business  will  need  approximately  $200,000  in  capital  (other  than  trade  payables)  during  the  first  two  years  of  its  operations  before  it  starts  to  earn  sufficient  profits  to  pay  a  return  on  the  shareholder’s  investment.  The  first  $100,000  of  this  total  is  to  come  from  Cecile’s  contributed  capital.  The  remaining  $100,000  of  funds will come from one of the following three sources:

•  Have the corporation borrow the $100,000 from a local bank. Cecile is required to act

as a guarantor for the loan.

•  Have the corporation borrow $100,000 from the estate of Cecile’s late husband. Cecile

is the sole beneficiary of the estate.

•  Have Cecile lend $100,000 to the corporation from her personal funds.

The S corporation will pay interest at a rate acceptable to the IRS. During the first two years  of  operations,  the  corporation  anticipates  losing  $125,000  before  it  begins  to  earn a  profit.  Your  tax  manager  has  asked  you  to  evaluate  the  tax  ramifications  of  each  of  the three  financing  alternatives.  Prepare  a  memorandum  to  the  tax  manager  outlining  the information you found in your research