Please help on this assignment!!!

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 2008. 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 2011. Maria and Jason each own 15,000 shares of the corporation's only class of stock. I Since receiving her MBA at the University of New Mexico, Maria had worked in various positions in Santenig's, a large upscale franchise restaurant chain. In 2006 , she was promoted to the position of vice-president in charge of development (site expansion). Jason was a regional manager in the same chain. Maria and Jason decided in 2007 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 2004 . Each new Flatirons location is developed at a converted service station. 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 Hopg, was one of the original owners of Santenig's. He plans to take an early retirement offer from Santonig's and devote his full-time efforts to the new endeavor; his Santonig's non-compete clause applies only in New Mexico. He 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 the specified remodeling work. When completed, the San Antonio locations will have a fair market value of $750,000. Hogp's basis in the stations is about $650,000. 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 permitting Robert to require the corporation to redeem the stock for $375,000 at any time five years after its issuance. The other new investor, Elizabeth James, is the chief financial officer for Santonig's. She will contribute $250,000 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 serve as CFO for Flatirons and receive a salary for that work. 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. Presently, Flatirons does not use separate corporate offices. Maria and Jason each have operated out of their homes, and from small offices within the restaurant locations. Although they spend most of their time on site training new personnel and managing the day-to-day operations, they find it easier to do paperwork and deal with suppliers electronically from their home offices. Maria and Jason also are concerned about confidentiality and data security, in that they do not want employees to overhear conversations about expansion or other contract details. There are no plans at this point to rent other office space for Flatirons, until the expansion proves successful and the owners can reach agreement on the best location for the general offices. Elizabeth is the only employee who will not spend much time at the restaurants on site. She will convert a large room in her home to an office and keep the corporate books and records there. She generally will work out of this home office, but Elizabeth will travel to the various Flatirons locations as needed. Page 2 of 3 PwC Case Studies in Taxation, (9) 2012, PwC, LLP FLATIRONS, INC. Robert primarily will be responsible for opening new restaurants in Dallas, Houston, San Antonio, and Austin. He will spend most of his time on location at the various restaurant sites. Because he will be traveling among the four cities so often, Robert and the other shareholders believe that he needs to keep files for all locations in a central place, probably Microsoft SkyDrive. This way, shareholders can meet by conference call or Skype on a regular basis. Everyone has agreed that Robert needs to live in Texas during the period of opening and establishing the new restaurants. If all goes well, he plans to return to California to open new locations there in the following few years. He has rented an apartment in San Antonio and will travel between the four cities during the expected two-year start-up period. His family will stay in Los Angeles; he plans to return home for a few days every other week. The San Antonio apartment will have a room devoted entirely to Flatirons business. The corporation will reimburse each employee for all out-of-pocket travel and living expenses incurred, including the rent and utilities for Robert's apartment. The corporation will not reimburse Maria, Jason, or Elizabeth for home office space used. Elizabeth asks for your advice in setting up reimbursement policies and procedures. She has asked you to advise her with respect both to corporate procedures and information she should provide to the employees about the tax treatment of these items on their federal income tax returns. In reopening the old service stations, Maria and Jason ran into unexpected requirements for soil and ground water assessment and cleanup. Underground gasoline storage tanks installed before 1988 have a high incidence of leakage after they are approximately five years old. The leakage contaminates ground water. All of the properties were assessed by state agencies as to environmental damage that had occurred. Fees to conduct the assessments were $12,500 per site, for a total of $50,000. In addition, two of the Colorado properties required more extensive excavation and cleaning. The cleanup costs incurred on those two contaminated properties were $200,000 per site, totaling $400,000. Under the state's cleanup reimbursement programs, 85% of these costs were reimbursed from federal and state government funds. Of the $450,000 related to the assessments and cleanup, $340,000 was reimbursed by government bodies, and the remaining $110,000 was deducted on the Flatirons federal corporate income tax return. Evaluate the deductibility of these expenditures. Using current literature, complete the case titled "Small Business Flatiron Case" attached above. You will need to down load the case an answer the questions given. Some hints for this case are as follows: - Use the 351 and 1239 rules to compute the gain/loss recognized due to the capital contributions by Robert and Elizabeth. - How are Elizabeth's services treated by Flatirons for federal income tax purposes? - Compute the corporation's basis in the assets that it received from Robert. II - The deduction for expenses of an office in the home are found in 280H. - Robert might also be able to deduct some $162 travel expenses. - How would Flatirons and the employees be treated if an "accountable plan" were used for the expense reimbursements? A "nonaccountable plan"? III - Should Flatirons capitalize or deduct the costs of cleaning up the environmental contamination to the groundwater? - Does the Flatirons clean-up operation put the land to a new or different use, extend the property's useful life, or increase its value? Prepare a written case study analysis for the above assigned research case, minimum of 3-4 pages. The case analysis must be fully annotated with citations in proper legal form. (See writing guidelines located in Getting Started)