Irene Pesco is the owner of Delicious Alternatives, an unincorporated business that she operates as a...

   

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Irene Pesco is the owner of Delicious Alternatives, an unincorporated business that she operates as a sole proprietorship. Delicious Alternatives produces a plant-based formula that can be processed into food products that taste, smell, and feel identical to meat products such as beef, poultry, and seafood. The business then processes and sells the product to retailers and restaurants. For the past few years, Irene has spent all her time, money, and energy developing this formula and testing the end product by offering it to various retailers and restaurants for free. Based on her research and feedback from her customers, the formula has now been fully developed into a marketable product. Increasingly, customers are now willing to pay for the end products, and new customers are contacting the company and inquiring about the product. Irene believes that the company's products can be launched on large scale with an adequate level of marketing and advertising. However, Irene has neither the funds nor the expertise to engage in such marketing efforts. Mark Norman, an investor, has offered to invest $200,000 in Irene's company. In addition, Keystone Promotions, LLC, a marketing firm owned solely by William Drake, has agreed to perform the necessary marketing and promotional activities to launch the products in exchange for a share in the company. After the initial launch, the trio believe the company will be in a great position to go after larger investors and obtain enough capital to rapidly rise to the level of a multinational supplier of food products. To accommodate its objectives, Irene, Mark, and William agreed to form a new corporation, Delicious Alternatives, Inc. Irene, Mark, and Keystone Promotions, LLC will each contribute to the new corporation as follows: Irene will transfer all assets and liabilities of the existing unincorporated business. The business has assets with an aggregate adjusted basis of $500,000 and liabilities of $400,000. The liabilities were incurred in the ordinary course of business, and to support the business operations. The parties engaged a business valuation consultant, who determined the total value of all of the business's assets, including the goodwill and going concerned, to be $1,000,000. Mark will transfer $200,000 cash to the new corporation, to fund some of the out-of-pocket costs incurred in marketing activities. Keystone Promotions, LLC will perform the initial marketing and promotion functions necessary to establish the needed market awareness and name recognition for the company. Over the course of the next eight months, these services are estimated to be worth $400,000. In exchange for their contributions, the parties will receive the following: Irene: 600 shares in Delicious Alternatives, Inc. Mark: 200 shares in Delicious Alternatives, Inc. Keystone Promotions, LLC: 400 shares in Delicious Alternatives, Inc. The corporation will have a single class of shares. For the next rounds of investment, additional classes with varying, ownership and voting rights will be considered. Irene has come to you for advice. Specifically, she is concerned about the tax consequences of the transaction. Over the years, in addition to the debt incurred to support the operations of her business, she has invested every dollar she owned in the business and cannot afford a large tax liability. If the transaction has adverse tax consequences, she would like to know whether there are things she can do to mitigate them. Irene would also like to know her basis and holding period in the stock of the newly created corporation, and the corporation's basis and holding period in its assets under all alternatives considered. Irene Pesco is the owner of Delicious Alternatives, an unincorporated business that she operates as a sole proprietorship. Delicious Alternatives produces a plant-based formula that can be processed into food products that taste, smell, and feel identical to meat products such as beef, poultry, and seafood. The business then processes and sells the product to retailers and restaurants. For the past few years, Irene has spent all her time, money, and energy developing this formula and testing the end product by offering it to various retailers and restaurants for free. Based on her research and feedback from her customers, the formula has now been fully developed into a marketable product. Increasingly, customers are now willing to pay for the end products, and new customers are contacting the company and inquiring about the product. Irene believes that the company's products can be launched on large scale with an adequate level of marketing and advertising. However, Irene has neither the funds nor the expertise to engage in such marketing efforts. Mark Norman, an investor, has offered to invest $200,000 in Irene's company. In addition, Keystone Promotions, LLC, a marketing firm owned solely by William Drake, has agreed to perform the necessary marketing and promotional activities to launch the products in exchange for a share in the company. After the initial launch, the trio believe the company will be in a great position to go after larger investors and obtain enough capital to rapidly rise to the level of a multinational supplier of food products. To accommodate its objectives, Irene, Mark, and William agreed to form a new corporation, Delicious Alternatives, Inc. Irene, Mark, and Keystone Promotions, LLC will each contribute to the new corporation as follows: Irene will transfer all assets and liabilities of the existing unincorporated business. The business has assets with an aggregate adjusted basis of $500,000 and liabilities of $400,000. The liabilities were incurred in the ordinary course of business, and to support the business operations. The parties engaged a business valuation consultant, who determined the total value of all of the business's assets, including the goodwill and going concerned, to be $1,000,000. Mark will transfer $200,000 cash to the new corporation, to fund some of the out-of-pocket costs incurred in marketing activities. Keystone Promotions, LLC will perform the initial marketing and promotion functions necessary to establish the needed market awareness and name recognition for the company. Over the course of the next eight months, these services are estimated to be worth $400,000. In exchange for their contributions, the parties will receive the following: Irene: 600 shares in Delicious Alternatives, Inc. Mark: 200 shares in Delicious Alternatives, Inc. Keystone Promotions, LLC: 400 shares in Delicious Alternatives, Inc. The corporation will have a single class of shares. For the next rounds of investment, additional classes with varying, ownership and voting rights will be considered. Irene has come to you for advice. Specifically, she is concerned about the tax consequences of the transaction. Over the years, in addition to the debt incurred to support the operations of her business, she has invested every dollar she owned in the business and cannot afford a large tax liability. If the transaction has adverse tax consequences, she would like to know whether there are things she can do to mitigate them. Irene would also like to know her basis and holding period in the stock of the newly created corporation, and the corporation's basis and holding period in its assets under all alternatives considered.

Answer rating: 100% (QA)

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