Question

Angela and Betty each own 50% of Hair Sensations, an incorporated salon business. They have decided to split the corporation into two. Angela will keep Hair Sensations, and Betty will start a new company, Hair and Nails by Betty. $50,000 in equipment, $5,000 in cash, and $14,000 in loans will be split equally between the two corporations. The split of assets and liabilities between the two corporations will close on December 31, 20X8.

Document this transaction using the split-off type D reorganization memorandum format.

Show or explain all calculations within the body of the submission document. This means that you must use formulas and links so that your thought process can be examined. Make good use of comments to convey your thought process as well.

Maintain a formal tone and support your analysis. Back up your discussion with research from scholarly sources (you may not use the course textbook to fulfill this requirement).

Answer 1

A. Statement of facts:

1. Taxpayer information:

Corporation's legal name: Hair Sensations

Corporation's address:

Corporation's TIN:

Corporation's tax year begins Jan 1 and ends on Dec 31

The Corporation is owned 50% by Angela and 50% by Betty

The Corporation's method of accounting for maintaining the accounting books and filing its fedeal income tax return is cash

2. Description of Taxpayer's business operations:

Hair sensations is a closely held corporation that was incorporated in the state of ____on_____. The business activity code number for Hair sensations is ______. The business activity of Hair sensations is salon business

3. Facts relating to transaction

Angela and Betty each own 50% of Corporation

A. Angela and Betty are partners who decided to split the corporation into two. Angela will keep Hair Sensations, and Betty will start a new company, Hair and Nails by Betty. Both Angela and Betty believe the business would be more profitable and run more effeciently if the business were split off with each partner managing and operating his own company. This is the business purpose of the transaction. The split of assets and liabilities between Hair Sensations and Hair and Nails by Betty is as follows as of closing on December 31, 20X8:

Hair Sensations: -

1. Equipment: 50% of $50000: $ 25000

2. Cash: 50% of $5000: $ 2500

3. Loans: 50% of $14000: $ 7000

Total value received: $ 34500

Hair and Nails by Betty: -

1. Equipment: 50% of $50000: $ 25000

2. Cash: 50% of $5000: $ 2500

3. Loans: 50% of $14000: $ 7000

Total value received: $ 34500

The net value of assets and liabilities that Hair and Nails by Betty is equal to net value of assets and liabilities Hair sensation received in the split off.

The split off took place on December 31, 20X8 and is effective starting Jan 1, 20X9

B. Reason for memorandum

The memorandum is being completed for the following reason:

1. Hair sensations's business reorganization meets all the requirements of a Type-D tax free split off reorganization under Sec. 368(a)(1)(D), and related tax authorities, including Treasury regulations, IRS rulings, and court cases.