UCLA FEMBA Program
MGMT 227 -Spring 2011 (Prof. Freixes)
TAX ANALYSIS NO. 2
I. The Assignment
You will conduct tax research, using RIA’s online tax database, regarding one of the
issues listed below and prepare a Tax Memorandum to me with your analysis. You can
choose any of the topics for your paper. The paper should be 8-12 pages, single-spaced
and follow the Tax Memorandum format contained in samples I provided in the syllabus. I
expect you to follow the IRAC method and to cite your primary law authorities (e.g. IRC,
cases, regulations). YOU MAY PREPARE YOUR PAPER WITH UP TO FOUR OTHER
STUDENTS. The paper is due May 26, 2011 and is worth 25% of your class grade.
II. PROBLEM NO. 1
Reorganizations: ABC, Inc., a Delaware corporation, wishes to acquire XYZ, Inc., a
California corporation. ABC and XYZ are considering the following three alternatives:
A. Statutory Merger (ABC and XYZ will file Articles of Merger in Delaware).
B. Stock Exchange (ABC will buy the stock of XYZ shareholders in exchange for
stock of ABC).
C. Stock-for-Assets transaction (ABC will acquire the assets of XYZ in exchange for
stock of ABC).
Choose one of these options and write a tax memorandum explaining what the
requirements and limitations are for making this acquisition tax free to the shareholders
and corporations.
III. PROBLEM NO. 2:
Partnership Becomes Corporation: The 3 partners of ABC Associates, Arnold,
Betty and Charlie have been operating as a General Partnership for five years. They have
voted to convert to a Subchapter C corporation and wish to transfer the $ 1,800,000 in
assets they have in the Partnership to the Corporation as their initial capital contribution.
Discuss the tax consequences to the Partnership, the individual partners and the new
corporation of this transfer. What gains or losses will the parties recognize? What will be
the effect of this transfer on asset and partner/stockholder basis? You may create your
own assumptions as to partnership assets, liabilities, interests & bases in the transaction.
IV. PROBLEM NO. 3:
Choosing a Business Entity: Joe Ramirez and Sam Lee, Los Angeles residents,
have started a business selling travel and map software called “Where in the World?”.
They are operating as a general partnership and have not filed any forms with the
Secretary of State. Their sales have increased significantly and they now wish to formalize
their business relationship by creating a C corporation, S corporation or Limited Liability
Company. In addition, Travelmaps of California, a California “C” corporation, that owns a
large chain of travel shops, approached Joe and Sam to discuss a possible joint venture
with Where in the World? Based on the foregoing, discuss tax ramifications of these
various entities and make a recommendation as to which one best suits their needs from a
tax perspective.
V. PROBLEM NO. 4:
Conservation Easement: Larry and Linda Liberal own 60 acres of land in North Los
Angeles County. The land is worth $ 40 million dollars, as it is near to commercial and
residential developments. The Liberals developed 5 of the acres with commercial and light
industrial properties, and receive rental income from the development. They also live in a
10,000 square foot ranch house on 5 acres of the property, including stables for their
horses. The remaining acreage has oak groves, hiking trails and a small stream. The City
has approached the Liberals about providing public access to the community to the oak
groves and hiking trails and suggested the Liberals consider a “conservation easement”.
This may provide a charitable deduction for the Liberals on their income tax returns, as
well as provide savings on Estate Taxes (which are roughly 50%) when they die. Discuss
how this “conservation easement” can save the liberals both estate and income taxes.
VI. PROBLEM NO. 5:
Like-Kind Exchange/Partnerships (OPTION A): Four unrelated individuals, A, B, C
and D, are equal partners in ABCD Partnership. Each of the partners has an outside basis
of $ 5 million in the partnership. ABCD owns land and an office building. Renting space in
the office building is the primary purpose of the partnership. The real property has a
partnership basis of $ 20 million and a fair market value of $ 40 million. The partners wish
to sell the real property, but they cannot agree on what to do with the proceeds of the sale.
A & B would like to receive the cash proceeds from the sale and retire from the
partnership, while C & D would like to acquire similar rental real estate in a tax-free
exchange under Section 1031 of the IRC. However, complications may arise in
structuring the transaction so that it will still satisfy the requirements of a tax free Sec. 1031
IRC exchange (e.g. partnership interests cannot be exchanged). Discuss the various
alternative methods of structuring the sale to allow some partners to cash out, while others
qualify for like-kind exchange treatment. The ultimate goal will be to identify which of these
alternatives will best minimize the taxable gain to the partners on the sale of the
partnership property.
Like-Kind Exchange/Partnerships (OPTION B): From the facts in OPTION A,
assume instead that ABCD wishes to sell the real estate and acquire new property in a like
kind exchange for purposes of a development project. This may be difficult to accomplish
if the taxpayer wishes to build a property to receive as the replacement property – primarily
because of the 6-month time limit imposed by Section 1031. There is one option – a “build
to suit” transaction or “parking transaction”. Discuss how these “build to suit” transactions
can be structured by using a “parking” transaction that still qualifies as a 1031 tax free
exchange.