Paul and Jon are partners in a small successful restaurant. They want to expand but need a second location.
1. Paul and Jon are partners in a small successful restaurant. They want to expand but need a second location. They think their business has a FMV of $2,000,000 (and has a basis of $500,000 to Paul and a basis of $250,000 to Jon).
2. Jason is a real estate broker and investor. He normally buys real estate and sells it quickly. He is fully licensed as a real estate broker in Texas. Jason has a vacant lot that he paid $1,800,000 several years ago. The FMV is currently $1,000,000.
3. Jason has a big gain from his business this year and would love to offset it somehow but does not know how to do so. Paul and Jon do not want the transaction to cause them any gain this year
4. Paul and Jon approach Jason about the following business proposition: the restaurant and the land are contributed to a new corporation. Each gets 1/3 of the stock.
5. Jason is not sure he likes that idea and instead offers the following:
The corporation will distribute out to Jason a part of the parking lot (of the old location). The FMV is $200,000 and the basis to the corp is $75,000. Jason will contribute the new land for a 5 year note plus 3% annual interest, 15% of the stock and $300,000 in cash.
After the first year the corporation will distribute out to Jason another part of the old parking lot (FMV 250,000, basis to the corp of $100,000)
6. If #5 does not work- then Jason would take $750,000 in preferred stock (or options for common stock) and $250,000 in value of the parking lot land (see #5) but would want a fixed 10% dividend, conversation to common rights and a liquidation preference (if preferred stock).
7. Keep in mind Jason wants to own part of the restaurant- he thinks it will be successful…..
Assignment Questions:
What is the income tax consequences idea #4?
What is the income tax consequences idea #5?
What is the income tax consequences idea #6?
Is there a better economic structure that will give the three people the result they desire? If so what it is and defend the idea.
