ACCT 6353

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 $1,000,000 (and has a basis of $500,000 to Paul and a basis of $250,000 to Jon).

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 $300,000 several years ago.The FMV is currently $500,000.

3.All three create JPJ, Inc with one third ownership each.

4.In year one they consider the following:

a.The corporation will distribute out to Jason a part of the parking lot (of the old location).The FMV is $100,000 and the basis to the corporation is $75,000.Jason will contribute the new land with a FMV of $150,000 plus $50,000 in cash.

b.Separately, they want to pay a distribution of $25,000 to each shareholder in cash.The EP balance is zero for accumulated and $40,000 for current.

Assignment:

What is the income tax consequences idea #4a?

What is the income tax consequences idea #4b?

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.