FLATIRONS INC. Flatirons, Inc. (dba Flatirons Flapjacks Caf) specializes in unique breakfast and brunch menus and gourmet coffees. Maria Trujillo and Jason Johnson formed the corporation and opened the first location in Bozeman, Montana in 2010. Flatirons Flapjacks Caf was such an immediate success, Maria and Jason were able to raise money to open three additional Colorado locations in Aspen, Denver, and Boulder by January 2013. Maria and Jason each own 15,000 shares of the corporation's only class of common stock. Since receiving her MBA at the University of New Mexico, Maria had worked in various positions in Santonio's, a large upscale franchise restaurant chain. In 2008, she was promoted to the position of vicepresident in charge of development (site expansion). Jason was a regional manager in the same chain. Maria and Jason decided in 2009 to start their own restaurant, the original Flatirons Flapjacks Caf, because they believed they had a unique niche concept and the know-how to make it work. They opened the first Caf on Maria's property, an old service station she inherited from her grandfather, who closed it in 2006. Each new Flatirons location is developed at an older, converted service station, an architectural touch that customers have prized. After discussing methods of financing and managing expansion with you, Jason and Maria decided to expand into the Southwest by allowing two new investors who also had expertise in the restaurant business to purchase interests in their corporation. One of these investors, Robert Hopp, was one of the original owners of Santonio's. He plans to take an early retirement offer from Santonio's and devote his full-time efforts to the new Flatirons endeavor; his Santonios non-compete clause applies only in New Mexico. Hopp lives in Los Angeles and will maintain his permanent residence there. Robert has purchased three abandoned service stations in San Antonio, and he has begun Flatirons specified remodeling work. Hopp reports that he will show the following valuations and basis amounts for each of the stations when they are contributed to Flatiron.

Basis FMV Alamo Plaza $ 150,000 $ 210,000 Blanco Road 275,000 340,000 Military Drive 175,000 200,000

Totals on date of capital contribution $ 600,000 $ 750,000 Robert will contribute the stations to the corporation in exchange for 15,000 shares of stock and a five-year $375,000 note. As a substitute for the $375,000 note, Robert would consider receiving preferred stock that pays a cumulative dividend tied to the prime interest rate, and a clause permitting Robert to require the corporation to redeem the stock for $375,000 at any time five years or more after its issuance. The other new investor, Elizabeth James, currently is the Santonio's controller. She will contribute $250,000 cash, as well as $125,000 worth of her professional services required to: ? set up a new networked accounting and information system, ? negotiate contracts on additional locations, and ? negotiate loans necessary to complete the initial expansion plan. Elizabeth will receive 15,000 shares of Flatirons stock. After Elizabeth completes these initial responsibilities, she will be named Flatirons CFO and receive a salary for that work.

Question: (This is dealing withTaxation and bringing in new owners) Robert and Elizabeth want to know the tax consequences of the proposed transactions. Naturally, they would like to optimize the immediate tax effects. Describe the consequences to all parties of the transactions as they are proposed, and suggest any alterations in the plan you think will improve the tax consequences.

Maria Trujillo,15,000 shares Current Shareholder Jason Johnson,15,000 shares Current Shareholder

Elizabeth James,15,000 shares for $250K cash and$125K fmv of services

Robert Hopp,15,000 shares and $375K note for 3 gas stations,New Shareholder