Tax Research Memo Essay

1168 Words Sep 19th, 2012 5 Pages
To: File
From: Xinxin Shi
RE: Paula Green and Mary Brown (tax year 2012)

Facts

Paula Green, a U.S citizen and our client, is preparing to expand her business into landscaping field. Before the expansion, Paula already has already been operating the Green Thumb Nursery whose total assets with a $260,000 adjusted basis and a $500,000 FMV. To avoid the risk of paying unlimited debt, Paula plans to change business form from sole proprietorship into corporation. And Mary Brown, a U.S citizen and the other client, would like to invest $250,000 into this corporation.
The Green Thumb Nursery has earned approximately $55,000 per year; both Paula and Mary estimate that the new corporation would incur loss of $50,000 per year for the next
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Mary would not get taxed on the return of her principle. 3. Under Sec.163 (a), Corporation could get a deduction from the return paid to Mary 4. Paula would get all the appreciation of the corporation and manage the corporation on her own. 5. Paula’s share is Sec. 1244 stock. 6. Benefits of choosing to be S Corporation. According to Sec. 1361 and Reg.Sec. 1.1361-1, if Paula consent to the special election made by the corporation, the corporation could be an S corporation so that in the first two years, Paula could use the loss to offset their income from other sources. If necessary, Paula could revoke the decision, turning the corporation back into C Corporation.
Disadvantage:
1. Mary could not participate in management of the corporation, and she could not share the appreciation of the corporation. 2. All distributions (excluding reasonable salary) to Paula will be taxed as dividends to them. And the corporation could not deduct this part of distribution. 3. If the corporation goes into bankruptcy, Mary’s loss would be capital loss.

Option c: 1. All the stock is Sec.1244 stock. 2. Both Paula and Mary would share the appreciation in the corporation. 3. According to Sec.163 (a), bond interests paid to Paula and Mary are deductible by company 4. According to Sec. 1361 and

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