income tax consequences idea B u s i n e s s F i n a n c e

Facts:

• 1. Paul and Jon are partners in a small successful restaurant.They want to expand but need a second location.They think their business has a FMV of $2,000,000 (and has a basis of $500,000 to Paul and a basis of $250,000 to Jon).The business is currently an LLC.
• 2. Jason is a real estate broker and investor.He normally buys real estate and sells it quickly.He is fully licensed as a real estate broker in Texas.Jason has a vacant lot that he paid $200,000 several years ago.The FMV is currently $1,000,000.
• 3. No one wants gain from this transaction this year.
• 4. Paul and Jon approach Jason about the following business proposition:the restaurant and the land are contributed to a new corporation.Each gets 1/3 of the stock.
• 5. Jason is not sure he likes that idea and instead offers the following (all of this occurs when Jason is added to the new Corporation):
  • The corporation will distribute out to Jason a part of the parking lot (of the old location).The FMV is $200,000 and the basis to the corp is $100,000.Jason will contribute the new land for 29% of the stock.
• 6. If #5 does not work- then Jason would take $800,000 in preferred stock (or options for common stock) and $200,000 in value of the parking lot land (see #5) but would want a fixed 10% dividend, conversation to common rights and a liquidation preference (if preferred stock).
• 7. Keep in mind Jason wants to own part of the restaurant- he thinks it will be successful…..

Assignment:

10 points.What is the income tax consequences idea #4?

10 points.What is the income tax consequences idea #5?

10 points.What is the income tax consequences idea #6?

20 points.Is there a better economic structure that will give the three people the result they desire?If so what it is and defend the idea.