Ridge Development Group is formed on June 1st by John Parks and Sue Jones to operate as a calendar-year, accrual- basis company that develops and markets land to customers. John will contribute land with a fair market value of $1,000,000, an adjusted tax basis of $650,000, and a $400,000 nonrecourse bank loan incurred to purchase the land, for an interest in the company. The land was purchased by John three years ago and has been held as an investment. Sue will contribute shares of stock in Frontier Corporation with a fair market value of $200,000 and an adjusted tax basis of $125,000 and shares of stock in Yukon Corporation with a fair market value of $200,000 and an adjusted tax basis of $210,000, for an interest in the company. Sue purchased both blocks of stock 15 months ago as an investment. If Ridge Development Group is organized as a corporation, then John will receive 56 percent of the shares of stock for his interest and Sue will receive 44 percent of the shares of stock for her interest, after factoring in Ridge Development’s deferred tax liability. Alternatively, if organized as a limited liability company taxed as a partnership, then John will receive a 60 percent interest and Sue a 40 percent interest in Ridge Development Group. Ridge Development Group (Ridge) then proceeded to sell 30 percent of the land for $350,000 on October 20th, all of the shares of stock in Frontier Company for $215,000 on December 10th, and incurred selling and administrative expenses of $50,000 (all related to land sale), which is paid in cash before the end of the year. Ridge also distributed a total of $90,000 to John and Sue based on their proportional ownership on December 20th. Both John and Sue are single, between the ages of 40– 50, with no dependents, and each has wages of $110,000 from outside sources. Assume the current year corporate and We thank the editor, associate editor, and reviewers for their helpful comments during the review process. We also thank Beau Barnes, Andrew Bauer, Paul Beck, Jim Bodtke, Susan Curtis, Michael Donohoe, Gary Fleischman, Nancy Harp, Susan Murray, and Pete Lisowsky for their valuable insight and feedback on the case. Editor’s note: Accepted by Lori Holder-Webb. Submitted: August 2014 Accepted: May 2016 Published Online: September 2016 65 individual tax rates and refer to the Qualified Dividends and Capital Tax Worksheet, Form 8960 (Net Investment Income Tax) and Form 8959 (Additional Medicare Tax) for the calculation of taxes. CASE REQUIREMENTS Corporate
(C1) Prepare a schedule calculating the initial tax basis for John and Sue for the ownership interest in Ridge Development Group when it is formed as a corporation (stock basis). What is the holding period for John and Sue?
(C2) Will John or Sue be required to recognize any gain on the exchange of their property for stock in the corporation?
(C3) Prepare the initial and year-end U.S. GAAP and tax balance sheets for Ridge Development Group when it is formed as a corporation. Also, prepare the U.S. GAAP and tax income statements for the corporation. Note: You will have to calculate the deferred tax liability, following ASC 805-740-25-3, Business Combinations and Income Taxes, and ASC 740-10-25, Income Taxes, at the time of the formation (assume a 34 percent tax rate) and adjust the deferred tax liability at year-end. The stock ownership is 56 percent for John and 44 percent for Sue. (Show all your work.)
C4) If Ridge Development Group was organized as a corporation, then identify the different types of taxes that apply and analyze the tax implications for the entity and stockholders (John and Sue). More specifically, calculate the federal tax liability that would apply at the entity level and individual level (this includes income tax and net investment income tax). Is there any change in the shareholder’s stock basis? (Show all your work.)