Question

FLATIRONS INC.
Flatirons, Inc. (dba Flatirons Flapjacks Café) 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 2010. Flatirons Flapjacks Café 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 2013.
Maria and Jason each own 15,000 shares of the corporation's only class of common stock.

Since receiving her MBA at the University of New Mexico, Maria had worked in various positions in
Santonio's, a large upscale franchise restaurant chain. In 2008, she was promoted to the position of vicepresident
in charge of development (site expansion). Jason was a regional
manager in the same chain. Maria and Jason decided in 2009 to start their
own restaurant, the original Flatirons Flapjacks Café, because they believed
they had a unique niche concept and the know-how to make it work. They
opened the first Café on Maria's property, an old service station she
inherited from her grandfather, who closed it in 2006. Each new Flatirons
location is developed at an older, converted service station, an architectural
touch that customers have prized.
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 Hopp, was one of the original owners of Santonio's. He plans to take an
early retirement offer from Santonio's and devote his full-time efforts to the new Flatirons endeavor; his
Santonio’s non-compete clause applies only in New Mexico. Hopp 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 Flatiron’s
specified remodeling work. Hopp reports that he will show the following valuations and basis amounts for
each of the stations when they are contributed to Flatiron.

Basis FMV
Alamo Plaza $ 150,000 $ 210,000
Blanco Road 275,000 340,000
Military Drive 175,000 200,000

Totals on date of capital contribution $ 600,000 $ 750,000
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 a clause permitting Robert to require the
corporation to redeem the stock for $375,000 at any time five years or more after its issuance.

The other new investor, Elizabeth James, currently is the Santonio's
controller. She will contribute $250,000 cash, 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 be named Flatiron’s CFO
and receive a salary for that work.

Question: (This is dealing withTaxation and bringing in new owners)
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.

Maria Trujillo,15,000 shares Current Shareholder
Jason Johnson,15,000 shares Current Shareholder

Elizabeth James,15,000 shares for $250K cash and$125K fmv of services

Robert Hopp,15,000 shares and $375K note for 3 gas stations,New Shareholder

Answer 1

1. As Elizabeth has contributed $250,000 in cash which is equal to 200% of the amount for her professional services, jer exchange can be considered as an exchange under code 351 and so her contributions are considered non taxable.

Also in case of Robert, as the properties are transferred to a Corporation solely in exchange of stock it is considered a non taxable exchange under code 351.

As the preference share also are qualified stock , the exchange is qualified under cide 351.

2. The company will get a deduction equal to the fair market value of the services . The FMV of the services is treated as compensation paid by the Corporation.

3. Sec 1032(a) provides that the corporation doesnot recognize gain or loss when it receives property in exchange of stock. Hence , there will be no tax in for Flatrions.