Bob, Larry and Junior started a chili roasting company in 2009 called Chili Tales.

Bob contributed $60,000 cash, Larry contributed $30,000 cash, and Junior contributed land in Las Cruces with an adjusted basis of $50,000 and a fair market value of $80,000. The property was subject to a $20,000 liability, which was also transferred into the business. Larry and Junior each own 25% of the entity, and Bob owns 50%.

Bob ends up in charge of managing the company and the operations and everyone decides he should be paid a salary. Larry and Junior just hang out at the office occasionally and don’t do any actual work, but everyone agrees that they all should share in the profits.

Bob provided you this abbreviated Income Statement for 2019:

Gross operating income	$625,000
Cost of Goods Sold	195,000
Operating expenses	250,000
Total Operating Income	180,000
Other Income and Expenses:
Interest income from Cheeze Bank	2,000
Dividend Income from Microstorm, Inc. (all dividends were qualified)	4,000
Net Income	$186,000

You found the following information while reviewing other documents Bob sent you:

• The book operating expenses included a $5,000 cash contribution to Save the Manatee and nondeductible expenses of $2,500.
• Bob’s gross salary for 2019 was $75,000 and had been included in operating expenses.
• The three owners each received a distribution check for $20,000.
• The liabilities increased over the year by $30,000.
• Bob’s basis at the beginning of 2019 was $52,000; Larry’s basis at the beginning of 2019 was $17,000; and, Junior’s basis at the beginning of 2019 was $32,000.

a. Assume the three make an S-election on the day they form the corporation.

1. Calculate what each owner’s basis is in 2009 after forming the company. Assume the transaction meets all of the requirements under Sec. 351.

2. Calculate the Ordinary Business Income as it would appear on Page 1, Line 21 of Form 1120S.

3. What would the net change in AAA show for 2019? For this answer, ignore the beginning balance and use Schedule M-2 as a template to calculating the answer.

4. Calculate each shareholder’s basis at the end of 2019.

5. At the beginning of 2019, the company had no liabilities. During 2019, the company borrowed $100,000 from Cheeze Bank. Would this liability affect the three owners’ basis? Explain.

B. Assume the three form a General Partnership.

1. Would the basis for each partner be different than if they formed an S-Corporation? Explain, using at least two Code Sections as the basis for your answer.

2. Calculate the Ordinary Business Income as it would appear on Page 1, Line 22 of Form 1065.

3. Calculate each partner’s basis at the end of 2019.

4. Assume the same facts as in Question 5, above. Would this liability affect the three partners differently than your answer to Question 5? Explain.

C. Other than the liabilities question, list and briefly explain two possible differences you see between Chili Tales forming an S Corporation versus a General Partnership.

Answer rating: 100% (QA)

Part A 1 Bobs basis 60000 30000 50000 140000 Larrys basis 30000 50000 80000 Juniors basis 50000 2 Gross operating income 625000 Cost of Goods Sold 195000 Operating expenses 250000 Total Operating Inco... View the full answer