Assignment:
Background Your Client, Tom, asks you to review the following proposed transaction for the operation of a restaurant. Tom has asked you to review the structure, ownership interests and choice of form of doing business and to then advise him of the Income Tax advantages & disadvantages of the alternatives.
The Business:
George, Kim, Martha and Tom have decided to open a Polynesian restaurant that specializes in Asian food and tropical drinks.
The Owners:
George has no personal savings to invest; however, he has a bartender's license as well as seven years of experience as an assistant manager at a large restaurant. He plans to work full-time managing the restaurant. He will receive a salary of $50,000 per year plus his percentage of profits (see Proposed Structure).
Kim recently inherited $500,000 and is interested in investing up to $250,000 of it in a business opportunity. However, as a full-time medical student, Kim has neither the time nor the desire to operate the business. However, she wants a guaranteed payment of $10,000 per year and plans to sell her interest after 5 years.
Martha has personal savings of almost $80,000 and is willing to invest up to $60,000 of it in the restaurant. She also wants to set the remainder aside for her son's future college expenses. She has a full-time job in an law firm and plans on working no more than 10 hours per week but will receive no salary.
Tom is the owner of The Home-Cooked Meal restaurant which he operated for 10 years but recently closed. The Home-Cooked Meal was operated as a C corporation. It has furniture, fixtures and equipment (FF&E) with a FMV of $300,000 and adjusted basis of $40,000. The new restaurant can only use $250,000 (FMV) of the assets. Tom also owns the land and building where The Home-Cooked Meal operated and the parties believe that it is a great location for the new restaurant. The Building has a FMV of 275,000 and adjusted basis of $165,000; the Land has a FMV of $50,000 and adjusted basis of $50,000, the property (land & building) is subject to a mortgage of $200,000. Tom has grown tired of working in the restaurant business and wants only to be an investor.
Expected Operations - Years 1 & 2: The Business Plan expects that it will have a loss in Year 1 (after expenses, George's salary and Kim's guaranteed payment) of $150,000 and in Year 2 of $75,000.
Proposed Ownership & Capitalization: The following ownership and capitalization has been discussed:
Ownership Interest Contribution George 15%
Personal Services Kim 25% $250,000 Cash
Martha 10% $ 60,000 Cash and Personal Services
Tom 50% Tom will contribute $250,000 of the FF&E plus the Land & Building (FMV $325,000) Tom will receive $75,000 cash Payment from the Business.
ASSIGNMENT Part1. Evaluation of Income Tax Issues. With regard to the proposed ownership and capitalization, evaluate the income tax issues for Tom if the business is operated as (a) a General Partnership, (b) LLC or (c) Corporation. Your evaluation should address the tax issues for Tom upon formation, the operation & distributions, and transfers of interests. You should stay within the parameters of the facts set forth. Consider the ownership & capitalization as to other owners ONLY to the extent it may affect Tom. AND: ONLY discuss the income tax issues. The issues related to the form of doing business for this problem will be evaluated in the Tax Memo: Entity Formation (see Instructions Posted in Assignments). As the Tax Memo: Entity Formation and this Comprehensive Tax Project address related issues, you may refer to your evaluation in the other as necessary to explain your evaluation in this assignment but keep the references to a minimum.
Part 2. Your Recommendation.
Which form of doing business would you recommend? Explain your recommendation. INSTRUCTIONS Your submission must be in Memorandum format and must be 4 to 6 pages (not counting cover page, exhibits and references), single-spaced, 12 pt. Arial or Times New Roman font, analyzing ONLY the questions set forth above. All references must be set forth in APA Format. It is acknowledged that APA Format requires single-spaced format which is waived. Also, there is no need for an Abstract or Introduction. Write your answer in Memorandum format as if presented to a client. You can address it to me.