FACTS 1. Golden Gate Corporation (GGC) was formed in 2015 by two shareholders, Malcolm Jones and Linda Ramirez. Both Malcolm and Linda are U.S. residents. Malcolm contributed $250,000 cash in exchange for 250 shares, or 50% of the common stock. Linda contributed a patent with a value of $250,000 and a tax basis of zero in exchange for 250 shares, or 50% of the common stock. GGC has no other classes of stock. 2. In 2016, Linda loaned the corporation an additional $500,000. The loan was documented as a five-year promissory note, with a market interest rate, interest payable quarterly, and the principal of $500,000 due in five years. GGC made all interest payments on a timely basis but, in 2021, could not repay the principal. Currently, Linda and GGC have no arrangement regarding when the loan will be repaid. 3. In 2017, GGC needed additional cash. In 2017, it brought in four new investors, Individuals A, B, C, and D, each of whom acquired 100 shares of the corporations common stock for $75,000 cash. All four individuals are U.S. citizens. 4. In 2018, GGC obtained a loan of $1,000,000 from a bank. The loan was documented as a ten-year promissory note, with a market interest rate, interest payable quarterly, and the principal of $1,000,000 due in ten years. Linda agreed to subordinate her $500,000 loan to the bank loan as part of the financing. GGC made all interest payments on a timely basis and has made no principal payments. 5. In 2019, GGC hired a key engineer. As GGC was experiencing cash flow issues, the engineer received 100 shares of stock with an estimated value of $100,000 instead of his first six months salary. 6. On July 1, 2021, Individual D died, and Ds stock in GGC was transferred to Ds Estate. The Estate plans to distribute its assets, including its GGC stock, to Ds children by June 30, 2023. Delays in settling the Estates administrative matters might move the distribution date to the end of 2023. GGC has incurred losses since its inception. GGCs Board of Directors is concerned about the companys future profitability. In 2022, the Directors, Linda, and Malcolm held a meeting to discuss the companys future. The Board considered several options, including liquidation, sale of the stock or assets of the business, and continuing the business with additional financing. You have been hired by GGCs Board to provide tax advice on several questions. Your objective is to provide the best solutions for the shareholders of GGC as a whole and not just for Linda or Malcolm. GGC has provided you with the following documents: Capitalization Table showing current stock ownership Balance Sheet Projection of Income/Loss for the next five years. (Note: Excel versions of these documents are attached to the Case Study Assignment on eLearning if you wish to use them in your responses.) CAPITALIZATION TABLE as of December 31, 2022 BALANCE SHEET as of December 31, 2022 PROJECTED INCOME/LOSS for Years 2023 2027 Assume that unless provided otherwise: GGC has a net operating loss carryforward of 1,000,000, equal to its accumulated deficit, as of the end of 2022. GGC expects to lose an additional 200,000 in 2023 but then be profitable in the subsequent four years. GGC expects the value of its stock to double over the next five years due to achieving profitability and the increase in value of its goodwill and intangibles. GGC has a deficit in accumulated earnings and profits of (1,000,000) at the end of 2022. Its earnings and profits (before taxes) are expected to increase by its projected income (loss) for 2023 through 2027, as indicated above. Unless otherwise noted, GGCs projected taxable income is equal to its projected pre-tax book income. Except for the patent contributed by Linda in exchange for stock, the tax basis of its assets is equal to book value. The company has not paid any dividends and does not plan to do so in the foreseeable future. The company has a written plan to expand its business into two states, the costs of which are expected to be $200,000 over several years. However, the company is not certain when the expansion will take place. It is also considering acquiring a smaller competitor for a cost of $300,000, but no transaction has been approved by its Board. TOPIC 2 S Corporation Elections - REQUIRED The Board Chairperson has read about S Corporation elections and wonders if it would be beneficial for GGC to make an election for 2023. She understands that an S corporations income is passed through and taxed to its shareholders. Linda points out that all GGCs shareholders are in high tax brackets and would require distributions of 40% of the S corps income to pay their individual taxes. She is not certain GGC can afford to do so since it needs cash to service its debt and fund the future expansion of its business. (a) Describe whether you would recommend an election and your reasons. (b) What would be the tax consequences to Linda if the election were made in 2023 and the corporations taxable income (loss) is the same as the amount projected for 2023 -- i.e., a net loss of 200,000? Assume the loss of (200,000) in 2023 includes a gain of $250,000 from the sale of all of the inventory owned by GGC at the end of 2022, net of other operating losses of (450,000). Consider in your response the eligibility and timing of an S corporation election and the tax consequences to the corporation and Linda and Malcolm as shareholders. Is there any additional information you need to determine whether an S corp election can be made in 2023? What alternatives might you consider to making an election in 2023? Show your calculations and cite any applicable authority in your