Tax Research Memo Essay
From: Xinxin Shi
RE: Paula Green and Mary Brown (tax year 2012)
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 …show more content…
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