Central Colorado Leasing, Inc. (Central), a calendar year, accrual basis C corporation, is in the business of leasing heavy construction equipment and subcontracting certain types of heavy construction services. The average rental period for the equipment is two weeks, and the rental contracts provide that Central will perform all required maintenance and repair for the equipment during the rental period. Brothers Jonathan and James Black each own 50 percent of the outstanding stock of Central. Jonathan is the president of the corporation and James is the vice-president. Currently, the Black brothers have no interest in making an S election for their corporation. Attached are Central's financial statements for the current year. To generate a sizeable 1231/ capital gain and use the loss carryforward, Jonathan is considering selling Bishops Woods to Central. Central then will move its administrative operations into the vacant office space upon expiration of its present lease in June. Although Jonathan has not obtained an independent appraisal of Bishops Woods, he and James have agreed informally to a total purchase price of $3.25 million. Central will borrow this amount from an unrelated commercial lender, at market interest rates. The property forms the collateral on the debt. II Jonathan Black, James Black, James' three adult children, and two adult grandchildren are considering the creation of CC Asphalt, a new corporate venture through which to operate an asphalt paving business. The seven individuals anticipate capitalizing the corporation so as to become equal shareholders. The Black brothers have projected that the business will generate net income before taxes of approximately $80,000 per year. The family members have agreed upon a strategy to reinvest the after-tax corporate income in the business, with the expectation of selling their corporate stock at a substantial profit at a future date. To finance his capital contribution to CC Asphalt, James plans to borrow $250,000 in cash from Central. The note will be a properly drafted 1.0 percent demand note, when the market rate of interest for such loans is 2.5 percent. Jonathan Black has agreed to these terms for the proposed loan to his brother. Jonathan and James have requested that you identify any potential tax problems or planning ideas suggested by the facts presented. In responding to the Black brothers' request, be as specific as possible in describing the issues involved, and provide suggestions and/or alternatives you recommend to minimize risks and maximize opportunities. Central Colorado Leasing, Inc Book Balance Sheet 1. Company policy requires that customers make weekly payment on equipment rentals; therefore receivable balances generally are low. 2. Accrued expenses include a $25,000 year-end bonus payable to President Jonathan Black. 3. Jonathan and James Black both drive cars furnished to them by Central. The two brothers use the cars both for commuting and business reasons. Central Colorado Leasing, Inc Book Income Statement Year Ending December 31 Revenues Notes 1. Officers' salaries: Jonathan Black $150,000 (includes $25,000 accrued bonus); James Black $100,000. 2. Because of the small corporation exemption [55(e)], Central is not liable for the alternative minimum tax
