1) Required information:

Andy, Jim and Dwight are starting a professional paper shredding company, and they are still exploring the pros and cons of the following types of legal entities:

C-corporation

Limited partnership

S-corporation

Andy and Jim will each contribute $200,000 in cash in exchange for their ownership interest. Dwight will contribute a warehouse that he owns that will be used to house the shredder machines. The warehouse has an FMV of $290,000 and is encumbered by a $90,000 mortgage. Dwight purchased the warehouse 3 years ago for $180,000. It was agreed that the profit and loss from the company's operations will be divided equally (i.e. 1/3 each) amongst the three owners.

Andy will manage the company's operations in exchange for $75,000 in compensation per year. Jim and Dwight will have minimal involvement in the company's operations, as they also own and manage full-time a company they formed as an LLC that sells pickled beets.

In addition to the $90,000 mortgage on the warehouse that is considered qualified nonrecourse financing, the company will also have a $180,000 recourse loan with a local bank and $75,000 in nonrecourse accounts payable. Jim and Dwight will not be included as guarantors for the recourse loan.

What will be Andy's initial tax basis in his ownership interest under each entity type (including his share of liabilities, if applicable)? which one of these?

Type of Entity	Tax Basis	Support
C-Corporation	200,000	Cash contributed
S-Corporation	Same as LP	Same as LP
Limited Partnership ("LP")	435,000	Cash 200,000 + Qualified nonrecourse financing 30,000 + Nonrecourse debt 25,000 + Recourse debt 180,000

Type of Entity	Tax Basis	Support
C-corporation	380,000	Cash 200,000 + Nonrecourse debt 180,000
S-corporation	Same as C-corp	Same as C-corp
Limited Partnership ("LP")	315,000	Cash 200,000 + Qualified nonrecourse financing 30,000 + Nonrecourse debt 25,000 + Recourse debt 60,000

Type of Entity	Tax Basis	Support
C-corporation	200,000	Cash contributed
S-corporation	Same as C-corp	Same as C-corp
Limited Partnership ("LP")	435,000	Cash 200,000 + Qualified nonrecourse financing 30,000 + Nonrecourse debt 25,000 + Recourse debt 180,000

2)

Assume Andy, Jim and Dwight decided to form a C-corporation. In its first year of operations, the C-corporation generated taxable income of $270,000 and made a cash distribution of $108,000 to the shareholders. The distribution is characterized as a qualified dividend and is subject to the net investment income tax.

What would the overall effective tax rate be (corporate + individual tax impact) on the $270,000 taxable income earned in the first year? Do not include the impact on Andy's tax liability for his compensation received from the corporation.

Applicable tax rates:

Corporate - 21%

Individual - ordinary income - 37%

Individual - qualified dividend income - 20%

Individual - net investment income - 3.8%