Jean Reinhard Essay

A franchise is a legal agreement between franchisers and franchisees that consents use of the franchise’s trademark and trade name or marketing plan

A franchise as a separable intangible asset (ie. the license to operate a franchise). The company purchased the franchise for $100,000. There is an active market for this asset. There is even a current market price for this asset ($200,000). Therefore this asset can be revalued to fair value.

Parent Corporation has owned 60% of Subsidiary Corporation’s single class of stock for a number of years. Tyrone owns the remaining 40% of the Subsidiary stock. On August 10, of the current year, Parent purchases Tyrone’s Subsidiary stock for cash. On September 15, Subsidiary adopts a plan of liquidation. Subsidiary then makes a single liquidating distribution on October 1. The

Part 1: Partnership formation. In January of 2010, Jason and Jesse contribute the following assets to

1) Section 351: Since Individual will be in control (80%+ ownership) of future corporation, he will not incur a taxable event

both a and b (Yes.  The corporate structure provides for limited liability and ease of transferring ownership.)

b. Ken sold 1,000 shares of stock for $32 a share. He inherited the stock two years ago. His tax basis (or investment) in the

T, an individual taxpayer, plans to incorporate his farming and ranching activities, currently operated as a sole proprietorship. His primary purpose of incorporating is to transfer a portion of his ownership in land to his son and daughter. T believes that gifts of stock rather than land will keep his business intact. Included in the property he plans to transfer is machinery purchased two years earlier.

The proceeds collected from the sale of the patent would qualify as LTCG. However, the proceeds are limited as to each partner’s interest in the company. Therefore, Tom would only be able to report his equal distribution as LTCG.

1. This question addresses the effect of Microsoft’s software capitalization policy on its financial statements. Ignore any potential tax effects.

1. All distributions (excluding reasonable salary) to Paula and Mary will be taxed as dividends to them. And the corporation could not deduct this part of distribution.

ANALYSIS: The type of business entity that Ms. Growne selects can have both legal and tax implications. Having said this, there are some tax and legal considerations to examine regardless of the type of purchasing entity.

Roman Holiday defined reacquired franchise rights as “the excess of the net amount assigned to identifiable assets and liabilities recorded upon the acquisition of franchise markets.” It was classified as an intangible asset with an indefinite life. The reacquired franchise rights takes over 29% of Roman Holiday’s total asset and the complicities in the classifications introduce significant risks of material misstatement in the company’s financial statements. The classification should be critically assessed in order to ensure the fair presentation of the company’s financial statement.

In return, Helen receives 100 shares in Red Corporation. With respect to the transfers, (Points : 2)

As mentioned above, when an asset is sold it may be sold in excess of the owner’s basis. When this occurs the taxpayer may be taxed on the gain at the more favorable capital gains rate (typically around 15%). What was not discussed in prior modules, was the treatment of capital gains for corporations, treatment of capital losses for both individuals and corporations, and how the length of ownership impact the classification and tax treatment of assets upon their sale.