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Background:

Your Client, Tom, is the owner of The Home-Cooked Meal restaurant which he operated for 10 years. The restaurant was profitable until 2 years ago. Declining revenues from the changing tastes of diners and the temporary closure and limited operations due to the Covid-19 pandemic have resulted in net operating losses in 2020 and 2021 totaling $75,000.

The Home-Cooked Meal was operated as Home-Cooked Inc., a C corporation, owned 100% by Tom. The corporation has net negative accumulated E&P* of ($120,000) as of September 30, 2021. Its assets consist of furniture, fixtures, and equipment (FF&E) with a FMV of $300,000 and adjusted basis of $40,000 with accumulated depreciation of $210,000.

* The accumulated E&P is a net of the current E&P for 2021.

Tom also owns the land and building where The Home-Cooked Meal operated. The building has a FMV of 750,000 and adjusted basis of $425,000; the land has a FMV of $250,000 and adjusted basis of $50,000. The property (land & building) is subject to a mortgage of $200,000.

Tom previously considered closing the restaurant, selling the assets, and renting the real property.

George has been approached by two friends, George and Kim, who want to open an Asian Fusion Restaurant in Toms building. They would use or sell the FF&E owned by Toms C corporation in the new business. George and Kim are good friends and are not romantically involved.

George is a well-known Asian Fusion chef with a large following in the town. He is tired of working for others and wants to run his own restaurant. However, he has no personal savings to invest. He wants an ownership interest in the new restaurant in exchange for his services.

Kim is a nurse and recently inherited $1,250,000. George has convinced her to invest $500,000 in the new restaurant. Kim has neither the time nor the desire to engage in the day-to-day operations of the business. She wants a guaranteed payment of $25,000 per year and plans to sell her interest after 5 years.

George and Kim have proposed to give Tom a 30% ownership interest in the new restaurant for the FF&E of Home-Cooked. Kim would receive 50% ownership interest for her $500,000 investment and George would receive 20% for services rendered or to be rendered. The new restaurant would lease the land and building from Tom under a net-net-net lease at the market rates for similar real estate in the area.

George and Kim want to form a new corporation, New Corp., to which Tom will contribute all the FF&E ($300,000) of Home-Cooked Inc. The FF&E would be used in the restaurant or sold to provide cash to the new business. Tom would receive 30 shares of New Corp.; Kim would receive 50 shares and George would hold 20 shares.

Question: What are the income tax effects for Tom of liquidating Home-Cooked Inc. and contributing the FF&E to New Corp. in exchange for a 30% of New Corps stock?

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