Sunflower T-shirts, Inc., a calendar year S corporation, is in the business of selling custom printed T-shirts.

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Question:

Sunflower T-shirts, Inc., a calendar year S corporation, is in the business of selling custom printed T-shirts. Sunflower is owned 50% by Lisa Meneau and 50% by Eddie Sanchez. For the last two years, Sunflower has been struggling to stay in business. In fact, its cash flow was so bad that in 2022, Lisa and Eddie met with an attorney to discuss putting the corporation into bankruptcy. In an effort to stave off bankruptcy, the attorney met with Sunflower's banker to explore other options. Ultimately, Sunflower avoided bankruptcy when, in 2022, the bank cancelled $60,000 of Sunflower's debt. Sunflower's balance sheet immediately before the cancellation of debt was:

Balance Sheet Immediately Prior to Debt Cancellation
	Books	FMV
Cash	$ 15,000	$ 15,000
Inventory	22,000	20,000
Equipment	140,000	85,000
Land	45,000	150,000
Total Assets	$ 222,000	$ 270,000

Liabilities	$ 196,500	$ 196,500
Stock	1,000	49,000
Retained Earnings	24,500	24,500
Total Liab & Equity	$ 222,000	$ 270,000

Lisa and Eddie heard from a friend that the cancelled debt is not taxable. However, they have come to you to determine the actual tax implications of this debt forgiveness. The bank is sending a Form 1099-COD evidencing the $60,000 of debt relief to Sunflower.

The shareholders each have a basis of $12,500 in their Sunflower stock. And, although Sunflower has been doing poorly, they each have sufficient wealth to continue feeding Sunflower's losses (if necessary) for many more years.

tax research memo to the 2022 Sunflower, Inc. Tax File. Copy your tax partner, Amie Lopez, on the memo.

Use the tax memo template posted on Canvas. Headings in the memo should be Facts, Issue, Analysis, and Conclusion.

In the memo you should discuss the tax implications for Sunflower and for its shareholders. Some examples of what to consider: Will the debt forgiveness be taxable? How will it be treated by the shareholders? Will it increase the shareholder's basis in their Sunflower stock? Include anything that you believe will be important for Sunflower and its shareholders to know about this.