Bearden’s Specialty Produce, Inc.

Bearden’s Specialty Produce, Inc.

Your client, Mr. Frank Bearden, owns a business that brokers high-quality fresh fruits and vegetables to restaurants and specialty grocery stores. Frank’s business does not carry any inventories. Frank’s lawyer has urged Franks to incorporate the business, primarily because of the limited shareholder liability associated with corporate status. Frank has operated the business as a cash basis sole proprietorship since 1985, and anticipates incorporating the business on July 1, 2014. A projected balance sheet and income statement for the business as of June 30, 2014 are attached.

I.

Frank plans to transfer all existing business assets and liabilities to a newly incorporated entity, “Bearden’s Specialty Produce, Inc.” (Produce), in exchange for 1,000 shares of voting common stock. He will serve as President of the corporation, and will be a member of the Board of Directors. Frank wants to adopt an August 31 fiscal year end for Produce because August tends to be the slowest month of the year for the business, and accounts receivables typically are at their lowest level. Frank also intends to continue to use the cash method of accounting.

Frank’s close friend, Tom Wheeler, has for some time been interested in buying into Frank’s Business. Because Tom will not have access to the necessary cash until October 2014, Frank has agreed to proceed with the incorporation, then simply sell 400 of his new Produce shares for $75,000 to Tom sometime before the end of 2014.

In discussing the proposed incorporation with you, Frank specifically asks about the amount of any gain he must recognize, both upon the incorporation itself, and upon the subsequent stock sale. Naturally, he is eager to minimize gain to the extent possible. Frank also wants to structure the transaction in such a way as to secure the best tax outcome for Tom Wheeler, as Frank is very eager to have him as a business associate. In addition to addressing these specific concerns, identify any potential tax problems or planning ideas suggested by the above facts. Discuss choice of entity in particular. Be as specific as possible in describing the issues involved, and provide suggestions and/or alternatives you might recommend to minimize risks and maximize opportunities.

Projected Balance Sheet

June 30, 2014

Fair Market

Assets Tax Basis Value

Trade accounts receivable $ 0 $ 88,000

Office fixtures 63,000 50,000

acc.depr. (13,000) -

Trucks 150,000 140,000

acc.depr. (69,000) -

$131,000 $278,000

Liabilities and Net Worth

Accounts payable (ordinary and

necessary business expenses) $ 59,000

Employee salaries payable 3,200

Notes payable* 100,000

Net worth 115,800

$ 278,000

*incurred on purchase of new trucks

Bearden’s Specialty Produce

Projected Income Statement

For January 1 – June 30, 2014

Brokerage commissions $195,000

Deductions:

Employees’ salaries and wages 33,000

Rent 13,000

Depreciation 18,000

Legal fees for advice on incorporation* 7,000

Other operating expenses 11,000

82,000

Projected 2014 Schedule C net income $113,000

*Frank’s lawyer estimates that additional legal costs for drafting the corporate charter and by-laws and for filling the necessary legal papers with the state of Arkansas will total $8,000. Frank estimates that Produce will also incur accounting fees attributable to the incorporation of $3,200.