Homework Assignment 2

Please compute the following 3 phases. I realize this is a lot of information, but this will really help wrap up the entire corporate life into one assignment.

Phase 1:

4 Individuals want to form the Big Bad Violin Brewing Company

Individual 1 Gives $100,000 for 1,000 shares

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

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.

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

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:

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

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.

Distribution of $100,000 - $25,000 is each shareholder

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.