Your client, Pumpkin, Inc. (a C corporation) is owned equally by three individuals, Gomez and Morticia, who are husband and wife, and Fester, who is the uncle of Gomez. Each owns 100 shares of Pumpkin. Pumpkin manufactures Halloween costumes and novelty items, and for the last few years, business has been booming because of the increasing popularity of Halloween. Unfortunately, the business is very seasonal so retaining qualified employees is problematic since the employees are terminated each year on October 31.

To reduce the seasonal nature of the business, the owners of Pumpkin are considering the acquisition of Fireworks, a sole proprietorship owned by George. Fireworks manufactures fireworks, costumes and novelties items that are popular during the 4 ^th of July.

Gomez meets with you and the tax partner in your accounting firm to discuss his acquisition and restructuring plan. Under this plan, George will contribute the assets and liabilities of Fireworks in exchange for 200 newly issued shares of Pumpkin. In addition, Gomez would like to reward his long-time employee, Lurch by giving him 100 shares of newly issued Pumpkin shares in exchange for his long and faithful service.

Gomez would like to understand the income tax consequences of this transaction. He would like to keep any taxes on the transaction to a minimum, and is willing to listen to any suggestions you have that will achieve his business and tax objectives.

Part 1

Prepare a brief memo for the tax partner outlining your initial reactions about the tax consequences of this transaction, and any planning alternatives that should be considered. In addition, prepare an email to Gomez with a list of additional information you require.

Part 2

Prepare a technical memo to the tax partner that discusses the tax consequences of the proposed transaction and any suggestions you have to reduce of defer any income tax due.   The tax partner would like the format of the memo to include the following sections: Tax issues or questions to addressed; Summary of your conclusions; Relevant facts; Discussion and analysis. The last section of the memo should contain cites to primary authority that support your conclusions and suggestions.

Part 3

Prepare a “nontax technical” letter to the client outlining the facts, your analysis and conclusions. You can attach the technical memo to the letter.