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					Part I Moe Szyslak, a former boxer, is the owner and operator of the local Springfield drinking establishment, a place he inventively named Moe’s Tavern. Moe’s store is successful, but he would like to open a new store. In order to do so, and limit his liability (Moe’s Tavern has endured no less than six fires and 13 brawls in the last few months), Moe would like to incorporate his business, sell a portion of the stock to new investors, and possibly hire a new bar tender for the second store. Moe has contacted a local bigwig and 60 percent owner of Springfield Nuclear Power, Inc., Charles Montgomery Burns (“Monty”), to invest in the business. Monty hired a local accountant to perform due diligence on Moe’s business. The accountant has appraised the assets of Moe’s business to be worth $800. The accountant has prepared the following balance sheet for Moe’s Tavern showing the current fair market values and Moe’s tax basis in each asset. Assets: Inventory Equipment Real Property Total Assets: Value: 250 100 450 800 Basis: 200 150 100 450

Moe is also the sole obligor on a line of credit from the Springfield Bank at an interest rate of 9% per annum. The current outstanding balance on the line of credit is $100. Moe used the proceeds from the line of credit to make capital improvements to tavern. Monty has agreed to invest an additional $300 in cash in the business to be used to finance new operations. Moe’s lawyer (and shoe repairer), Lionel Hutz, suggests forming a new corporation, Flaming Moe’s, Inc. (“Flaming Moe’s”). Hutz proposes that Moe transfer the Moe’s Tavern assets listed above to Flaming Moe’s in exchange for 700 shares of Flaming Moe’s voting common stock plus Flaming Moe’s assumption of the entire $100 outstanding balance on the line of credit. Hutz proposes that Monty transfer his $300 to Flaming Moe’s in exchange for 300 shares of Flaming Moe’s voting common stock. (Each share of common stock will posses one vote.) Carl Carlson, the loan officer at the Springfield Bank, was feeling particularly generous so close to the Holidays (and was himself a regular at Moe’s), and has agreed to allow Moe’s line of credit to be assumed by Flaming Moe’s. All parties agree to go forward with the plan outlined by Hutz on January 1, 1999.

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(a)

You are a new associate at Hutz’s law firm, “I Can’t Believe It’s A Law Firm™.” Assume the facts are as stated above. Hutz has asked you to prepare answers to the following questions: (i) will Moe recognize any gain or loss on the transfer of the Moe’s Tavern assets to Flaming Moe’s in exchange for Flaming Moe’s voting common stock and Flaming Moe’s’s assumption of Moe’s line of credit; (ii) what will Moe’s basis be in the Flaming Moe’s stock he receives; (iii) what will Flaming Moe’s basis be in the assets received from Moe? Assume that the fair market values of the assets are the same, but the outstanding balance on the line of credit is $500. Moe transfers the Moe’s Tavern assets to Flaming Moe’s in exchange for 500 shares of Flaming Moe’s voting common stock plus Flaming Moe’s assumption of the $500 outstanding balance on the line of credit. Monty transfers his $300 to Flaming Moe’s in exchange for 500 shares of Flaming Moe’s voting common stock. How will your answers differ? Assume that Moe would like to “cash out” a portion of his investment in Moe’s Tavern. Assume Moe transfers the same assets as in 1(a) above (shown again below) to Flaming Moe’s: Assets: Inventory Equipment Real Property Total Assets: Value: 250 100 450 800 Basis: 200 150 100 450

(b)

(c)

Assume that Moe transfers these assets to Flaming Moe’s in exchange for 600 shares of Flaming Moe’s voting common stock and $200 in cash. (Assume Flaming Moe’s does not assume any part of the line of credit; instead, Moe plans to use the proceeds received from the transfer to pay off the balance.) Monty now transfers $400 in cash in exchange for 400 shares of Flaming Moe’s voting common stock. How would your answers differ? (d) Assume the same basic facts as 1(a) above. Prior to the formation of Flaming Moe’s, however, Moe and Monty hear that Homer J. Simpson has recently invented a popular new drink, the Flaming Homer, made of Tequila, Schnapps, Crème de Menthe and a secret ingredient: Krusty Non-Narkotik Kough Syrup. Moe and Monty approach Homer about transferring all rights to the Flaming Homer formula, trademark and tradename to Flaming Moe’s in exchange for 300 shares of Flaming Moe’s voting preferred stock. Homer says “whoo hoo!” but would also like a case of Duff beer included (with a fair market value of $10).

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Assume Homer has a zero basis in the Flaming Homer formula, trademark and tradename. Hutz would like you to report to him as to how Homer’s transfer of the Flaming Homer formula, trademark and tradename in exchange for 300 shares of Flaming Moe’s voting preferred stock (each shares having one vote) would affect your answers in 1(a). Homer also calls you to ask whether he would recognize any gain or loss on the receipt of the shares. What should you tell him? (e) Assume the same basic facts as 1(a) above. Prior to the formation of Flaming Moe’s, however, Moe and Monty hear that Barney Gumble has quit drinking and is looking for work as a bar tender. Barney is a legend and currently holds the world’s record for highest blood alcohol content without cardiac arrest. Moe and Monty approach Barney about becoming a Flaming Moe’s employee. Barney is amenable, but would also like a part of the “upside” of the business. Barney proposes that he receive stock in Flaming Moe’s as well. Barney’s business advisor, Apu Nahasapeemapetilon, proposes that (1) Moe transfer the Moe’s Tavern assets to Flaming Moe’s in exchange for 460 shares of Flaming Moe’s voting common stock plus Flaming Moe’s assumption of the entire $100 outstanding balance on line of credit; (2) Monty transfer his $300 to Flaming Moe’s in exchange for 200 shares of Flaming Moe’s voting common stock; and (3) Barney becomes an employee and receive 340 shares of Flaming Moe’s voting common stock. Moe and Monty agree in principle, but Hutz would like you to report to him as to whether Apu’s proposal has any adverse consequences to Moe.

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Part II On January 1, 2000, Flaming Moe’s capital structure was structured as follows: Shareholder Moe Monty Shares 700 300 Class Voting Common Stock Voting Common Stock

As of January 1, 2001, Flaming Moe’s had an accumulated E&P of $90,000.For the year ended December 31, 2001, Flaming Moe’s has current E&P from operations (i.e., not taking into account the effect of the distributions described below) of $85,000. On January 31, 2001, Flaming Moe’s distributed $70,000 to Moe and $30,000 to Monty. On November 15, 2001 Flaming Moe’s distributed a mechanical bull to Moe and a car to Monty. On the date of the distribution, the mechanical bull had an adjusted basis of $10,000 and a fair market of $35,000 in the hands of Flaming Moe’s. On the date of the distribution, the car had an adjusted basis of $0 and a fair market of $15,000 in the hands of Flaming Moe’s. On December 31, 2001, Flaming Moe’s distributed $70,000 to Moe and $30,000 to Monty. Determine the federal income tax consequences (including the impact on Flaming Moe’s E&P), with respect to the above distributions, to Flaming Moe’s, Moe and Monty.

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Part III Business continues to boom at Flaming Moe’s. In 2002, Flaming Moe’s generated $1 million of current E&P. On January 1, 2003, in an effort to raise even more capital and continue to grow, Flaming Moe’s sold additional common stock so that the current capital structure as of January 1, 2003 was as follows: Shareholder Moe Abraham Simpson Lisa Simpson Monty Selma Bouvier Terwilliger Hutz McClure Springfield Nuclear Power, Inc. Homer Simpson Shares 700 20 20 300 Instrument Voting Common Stock Voting Common Stock Voting Common Stock Voting Common Stock

20 50 1,000

Voting Common Stock Voting Common Stock Nonvoting Preferred Stock

Abraham is Homer’s father and Lisa’s grandfather. Homer is Lisa’s father. Selma is Homer’s wife’s sister. No other shareholders have any familial relationship. Monty owns 60 percent of both the voting power and value of Springfield Nuclear Power, Inc. stock. (a) Homer has decided that he would like to terminate his interest in Flaming Moe’s in order to invest in his brother Herb’s new invention, a baby voice translator. Flaming Moe’s agrees to redeem all 1,000 shares of its nonvoting preferred stock held by Homer in exchange for $100,000. Determine the U.S. federal income tax consequences to both Homer and Flaming Moe’s with respect to the redemption. (b) Same as (a), above, except that one month later Lisa, upon discovering that Moe has been illegally trafficking endangered species, also completely terminates her interest in Flaming Moe’s. Determine the U.S. federal income tax consequences to Homer, Lisa, and Flaming Moe’s with respect to the redemption. (c) In need of additional resources to pay for the latest environmental clean-up resulting from the latest meltdown (or as Monty prefers to call it, an unrequested fission surplus), Springfield Nuclear Power, Inc. and Flaming Moe’s agree to redeem Springfield Nuclear Power, Inc.’s 50 shares of common stock. Determine the U.S. federal income tax consequences to both Springfield Nuclear Power, Inc. and Flaming Moe’s with respect to the redemption.

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Part IV On January 1, 2003, Flaming Moe’s is considering various changes to its capital structure and other corporate actions. On January 1, 2003, Flaming Moe’s has $2 million in accumulated E&P. Flaming Moe’s current capital structure is as follows: Shareholder Moe Shares 700 100 300 1,000 Instrument Voting Common Stock Nonvoting Preferred Stock Voting Common Stock Nonvoting Preferred Stock

Monty Homer

Explain the U.S. federal income tax consequences to Flaming Moe’s and its shareholders resulting from each of the following transactions (assume each transaction occurs without the other transaction occurring unless stated otherwise). (a) Flaming Moe’s has indebtedness outstanding with Anthony “Fat Tony” D’Amico, the local Mafia Don and president of the Legitimate Businesman’s Club. Such indebtedness is convertible into common stock of Flaming Moe’s. In lieu of paying interest on the indebtedness with Fat Tony, Flaming Moe’s transfers shares of nonvoting preferred stock to Fat Tony. Flaming Moe’s would like to pay a “dividend” to its common stock shareholders, but in order to preserve capital to pay for planned expansion into Shelbyville and Capital City, Flaming Moe’s decides to distribute one share of new Junior Nonvoting Preferred Stock (i.e., junior to the Nonvoting Preferred Stock) with respect to each share of common stock outstanding. Same as (b), except that on January 1, 2004, Monty sells his Junior Nonvoting Preferred Stock to Disco Stu for $200,000 and Staying Alive movie poster signed by John Travolta worth $35,000. Monty’s adjusted basis in his common stock prior to the initial distribution of Junior Nonvoting Preferred Stock was $300,000. On the date of the distribution of Junior Nonvoting Preferred Stock, the common stock had a fair market value of $500,000 and the Junior Nonvoting Preferred Stock had a fair market value of $250,000.

(b)

(c)

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Part V An elderly man discovers that Springfield has had a ban on alcohol for 200 years with no one enforcing it. As a result, Mayor Joseph “Diamond Joe” Quimby, Jr. has no choice but to ban all sales of alcohol within the Springfield city limits. At first, Flaming Moe’s beer supply is coming from Fat Tony’s mob. However, in time, the supply dries up and the shareholders of Flaming Moe’s decide it is time to liquidate the corporation. Flaming Moe’s now has the following assets: (1) furniture and bar equipment with a basis of $100,000 and a fair market value of $200,000; (2) land with a basis of $50,000 and a fair market value of $400,000; (3) a portfolio stock interest in Laramie Cigarettes, Inc., with a basis of $300,000 and a fair market value of $100,000; and (4) cash in the amount of $300,000. Flaming Moe’s has held these assets for three years. Flaming Moe’s has no liabilities and hence its aggregate stock value is $1 million. Flaming Moe’s has substantial current and accumulated earnings and profits. Flaming Moe’s capital structure is as follows: Shareholder Moe Monty Shares 700 300 Instrument Voting Common Stock Voting Common Stock

Moe’s basis in his Flaming Moe’s Common Stock is $200,000. Monty’s basis in his Common Stock is $100,000. Both Moe and Monty have held their Flaming Moe’s stock for more than 1 year. (a) Flaming Moe’s liquidates for U.S. federal income tax purposes. Flaming Moe’s distributes the furniture, bar equipment, land, and the Laramie Cigarettes, Inc. to Moe in cancellation of Moe’s stock. Flaming Moe’s distributes the $300,000 to Monty in cancellation of Monty’s stock. What are the U.S. federal income tax consequences to Flaming Moe’s, Moe, and Monty from this transaction? (b) Eighteen months prior to the adoption of the plan of liquidation, Monty transferred his stock in the Burns Slant-Drilling Co. to Flaming Moe’s for additional stock in Flaming Moe’s. Monty’s adjusted basis in the Springfield Slant Drilling Company on the date of the transfer was $100,000 and the fair market value of the stock was $10,000. Pursuant to the same plan, Moe transferred $900 in exchange for Flaming Moe’s stock. When Flaming Moe’s liquidates, Flaming Moe’s distributes all of its assets pro rata to its shareholders. What are the U.S. federal income tax consequences of this transaction?

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(c) Assume that Flaming Moe’s simply distributes its land and Laramie Cigarettes, Inc. stock to Moe and distributes $300,000 cash to Monty, but Flaming Moe’s retains the equipment. Flaming Moe’s does not dissolve for local corporate law purposes. What are the U.S. federal income tax consequences of this transaction?

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