Kim, Doug and Kelsey plan to start farming business together in Clinton, NY called New York Farmers. They would like your advice on on the types of business entities and the advantages and disadvantages of each. Kim and Doug will each own 40% of the business and Kelsey will own 20%.

Kim will contribute cash of $400,000, Doug will contribute land with an FMV of $600,000 and an adjusted basis of $250,000. Kelsey will contribute services of $200,000. In addition, Doug receives $200,000 of cash.

Kim, Doug and Kelsey have indicated that they would like to take distributions of profits from New York Farmers each year in addition to compensation. They plan to pay themselves compensation of $50,000 each and they project that New York Farmers will have $40,000 in profits each year that they would like to distribute based on their ownership percentages.

The distributions are as follows:

Adjusted Basis	FMV
Kim - Equipment	$10,000	$16,000
Doug - Cash	$16,000	$16,000
Kelsey - Cash	$8,000	$8,000

Explain the tax treatment of cash and property distributions/dividends to a shareholder/member/partner of each type of entity. Include in your discussion an explanation of the concepts of E&P and AAA and the purpose of those calculations.

• Calculate Kim's basis in the distributed property assuming New York Farmers is a C Corporation and indicate whether the property distribution would result in gain or loss recognition. Assume Kim's basis just prior to the distribution was $1,000. Would your answer change if this was a liquidating distribution?
• Calculate Kim's basis in the distributed property assuming New York Farmers is a partnership and indicate whether the property distribution would result in gain or loss recognition. Assume Kim's basis just prior to the distribution was $1,000. Would your answer change if this was a liquidating distribution?