Tax consequences

Maria and Mable have come to you seeking advice as to the tax consequences of their proposed formation of a corporation. Maria and Mable will contribute property to form Jazztime Inc. early in the current year and will also make the Subchapter S election. Both Maria and Mable are each to receive 50 of the authorized 100 shares of Jazztime. The 100 shares have a total FMV of $200,000. For her 50 shares Maria will contribute property with a FMV of $100,000 and a tax basis of $60,000. Mable will contribute property with a FMV of $280,000 and a tax basis of $140,000. The property to be contributed by Mable is encumbered by a nonrecourse mortgage of $180,000, which the corporation will assume. The mortgage will remain a nonrecourse mortgage to the corporation secured solely by the property. There was a valid business purpose to the debt transfer. The property was investment real estate that Mable had owned for seven years. Maria and Mable are asking you, in particular, the following questions.

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1) What will be Maria’s recognized gain, if any, from her contribution? Is it capital gain or ordinary income?

2) What will be Maria’s tax basis in her Jazztime stock?

3) What will be Mable’s recognized gain, if any, from her contribution? Is it capital gain or ordinary income?

4) What will be Mable’s tax basis in her Jazztime stock?

5) What will be the corporation’s tax basis in the property contributed by Mable?

6) During its first year of operations Jazztime is projected to have a business loss of $(80,000) on page 1 of its 1120S. If Maria and Mable make no further contributions to Jazztime, nor make any loans to the corporation, determine for both Maria and Mable: (a) how much of this business loss can be deducted by them in their 1040s for this first year of the S corporation; (b) their year-end tax basis in their stock, and (c) the tax status of any loss that they cannot deduct in their current year 1040s. Jazztime and both shareholders use the calendar year and both Maria and Mable are material participants in the activities of Jazztime.

7) If either shareholder has a projected loss that they cannot deduct this year what tax planning suggestions would you give them to accomplish before year-end?

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Required: Write a memo to Maria and Mable, giving them a concise “executive summary” of your conclusions above. You should reference the calculations (1-7 above), which should be shown as a separate page (or pages) from the memo. Your executive summary memo should be no more than one page and it should be typed. The computations on the separate page or pages should be detailed and explanatory, and should be in Word format. Spreadsheet format is not acceptable for formal memorandums to clients. In summary, a concise memo should be followed by detailed computations (clearly explained) that we referenced in the executive summary.

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This project can be completed with the knowledge base of Chapters 2 and 4 of the text. Each student is required to turn in his or her own completed project. This is not a group project. Your grade depends not only on a proper technical analysis but the use of proper English in the memo.

The project MUST be submitted through the Assignments module at Blackboard no later than 9pm on Monday, December 2. Penalties will be assessed for late submission.