Assuming they decided on setting up a corporation, Drew will be contributing a warehouse worth $ 125,000 which he originally purchased for $50,000 in exchange for ½ of the stock of the company. However, Carter does not know if he will be contributing $100,000 of machinery and $25,000 of cash or the machinery along with $25,000 of services for ½ of the stock of the company.

(2) Please explain the tax impact of the formation of the Company and what advice would you give Drew and Carter on what Carter should contribute.

During year 1, the Company Drew and Carter set up is profitable a nd called DC Townhouses , Inc . Its financials are as follows:

Income $1,250,000

Accounts Receivable $100,000

Account Payable $75,000

Purchase of new and used machinery $125,000

Bank loan of $125,000

Interest on a bank loan for the purchase of supplies $10,000

Employee meals $25,000

Client entertainment $12,000

(3) Please advise DC Townhouses , Inc. on its filings requirements and advise DC Townhouses , Inc. on the opportunities you see based upon its financials.

In year 10, after amassing a fortune, Drew and Carter decide to close DC Townhouses , Inc . The value of the remaining assets in the company are worth $125,000 and the company has cash on hand of $100,000.

(4) Please describe the tax impact of liquidating DC Townhouses , Inc . to both the Company and Drew and Carter.