McGraw-Hill's Taxation of Business Entities 3rd Edition by Connie Weaver, Brian Spilker, Edmund Outslay, John Robinson, Ronald Worsham, Benjamin Ayers, John Barrick

Exercise 48

{Research} Cool Touch Cookware (CTC) has been in business for about 10 years now. Dawn and Linda are each 50 percent owners of the business. They initially established the business with cash contributions. CTC manufactures unique cookware that remains cool to the touch when in use. CTC has been fairly profitable over the years. Dawn and Linda have both been actively involved in managing the business. They have developed very good personal relationships with many customers (both wholesale and retail) that, Dawn and Linda believe, keep the customers coming back.
On September 30 of the current year, CTC had all of its assets appraised. Below is CTC's balance sheet, as of September 30, with the corresponding appraisals of the fair market value of all of its assets. Note that CTC has several depreciated assets. CTC uses the hybrid method of accounting. It accounts for its gross margin-related items under the accrual method and it accounts for everything else using the cash method of accounting.
*CTC uses the LIFO method for determining the adjusted basis of its inventory. Its basis in the inventory under the FIFO method would have been $110,000.
**In addition, Dawn and Linda had the entire business appraised at $1,135,000, which is $200,000 more than the value of the identifiable assets.
From January 1 of the current year through September 30, CTC reported the following income:
Ordinary business income: $530,000
Dividends from XYZ stock: $12,000
Long-term capital losses: $15,000
Interest income: $ 3,000
Dawn and Linda are considering changing the business form of CTc.Required:
a. Assume CTC is organized as a C corporation. Identify significant tax and nontax issues associated with converting CTC from a C corporation to an S corporation. [Hint: see IRC §§1374 and 1363(d)]
b. Assume CTC is organized as a C corporation. Identify significant tax and nontax issues associated with converting CTC from a C corporation to an LLC. Assume CTC coverts to an LLC by distributing its assets to its shareholders who then contribute the assets to a new LLC. [Hint: see IRC §§331, 336, and 721(a)]
c. Assume that CTC is a C corporation with a net operating loss carryforward as of the beginning of the year in the amount of $2,000,000. Identify significant tax and nontax issues associated with converting CTC from a C corporation to an LLC. Assume CTC coverts to an LLC by distributing its assets to its shareholders who then contribute the assets to a new LLC. [Hint: see IRC §§172(a), 331, 336, and 721(a)]