CASE 3

On December 5, 2009, Football Innovations, Inc., executed an Initial Public Offering of its shares to raise capital for research. Football Innovations, Inc. (Company) is a C corporation, with its headquarters located in Alabama, specializing in helmet technology research in connection with Chronic Traumatic Encephalopathy, also known as CTE. The Companys board of directors authorized the issuance of 10,000,000 shares, but the Company issued only half of these shares during the IPO. The shares initially traded at $7 a share.

Steve Smith, an avid football fan, acquired 100,000 shares of the Company during the IPO. In exchange for the shares, Steve contributed land with a fair market value of $700,000 and a basis of $100,000.

On July 9, 2010, the Company issued an additional 2,500,000 shares. The shares were trading for $5 a share at the time of issuance. Steve acquired an additional 150,000 shares in the Company. This transaction was executed using cash.

On March 12, 2011, the Company issued the remaining authorized shares. The shares were trading at $4 a share at the time of issuance. Steve purchased an additional 100,000 shares with cash during this issuance.

Over the next several years the Company was able to make significant research progress with respect to CTE. On January 15, 2019, Steve sells 200,000 shares of the Company at $70 a share. Steves marginal tax rate in 2019 was 32%.

In light of the developing research efforts of the Company, additional competitors begin entering the helmet technology market in 2019. On February 28, 2019, a C corporation, American Football Technology, Inc., headquartered in Austin, Texas, executed an IPO of 1,000,000 shares at $5 a share. Steve really believes in what these companies are doing for football, so he purchases 100,000 shares with cash.

On March 31, 2020, Steve sells his remaining shares in the Company. The stock was trading at $75 at the time of disposition. Steves marginal tax rate in 2020 was 35%.

Steve has come to you for tax advice. Your client wishes to minimize his tax liability utilizing the qualified small business stock provisions. Please fully develop the tax issues associated with the above facts in a memo. The memo should be Times New Roman 12 point font with 1-inch margins. No more than 6 pages.

You may assume the IPO was the first year of operations for the Company and the balance sheet in subsequent years continues to reflect the initial cash inflows as assets. You may also assume that the IPO for American Football Technology, Inc. also occurred during the first year of operations.

Your analysis should also specifically address the following:

1. What is the amount of gain and tax liability on Steves stock disposition of the

Company in 2019?

2. What is the amount of gain and tax liability on Steves stock disposition of the

Company in 2020?

Prepare a Memo to me (as Tax Manager) addressing the above. 1 inch margins, Times New Roman 12 point, double spaced. No more than 6 pages.