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PwC Case Studies in Taxation, © 2013, PwC, LLP BEARDEN’S SPECIALTY PRODUCE, INC.Your client, Frank Bearden, owns an Arkansas business that brokers high-quality freshfruits and vegetables to restaurants and specialty grocery stores. Frank’s business doesnot carry any inventories. Frank’s attorney has urged Frank to incorporate the business,primarily because of the limited shareholder liability associated with corporate status,and to facilitate a business succession plan in the future. Frank has operated thebusiness as a cash basis sole proprietorship since 1985, and anticipates incorporatingthe business on July 1 of the current year. Projected balance sheet and incomestatements for the business as of June 30 are attached.PART IFrank plans to transfer all existing business assets and liabilities to a newly incorporatedentity, Bearden’s Specialty Produce, Inc. (Produce), in exchange for 1,000 shares ofvoting common stock. He will serve as President of the corporation, and he will be amember of the Board of Directors. Frank wants to adopt an August 31 fiscal year end forProduce because August tends to be the slowest month of the year forthe business, and accounts receivable typically are at their lowestlevel. Frank also intends for Produce to continue to use the cashmethod of accounting.Frank’s close friend, Maria Garcia, has for some time been interested in buying intoFrank’s business. Maria will not have access to the necessary cash until October, soFrank has agreed to proceed with the incorporation, and then sell 400 of his newProduce shares for $75,000 to Maria sometime before the end of the current year.REQUIRED: In discussing the proposed incorporation with you, Frank specifically asksabout the amount of any gain he must recognize, both upon the incorporation itself, andupon the subsequent stock sale. Naturally, he is eager to minimize any recognized gainto the extent possible. Frank also wants to structure the transaction to achieve the besttax outcome for Garcia, as Frank is eager to have her as a business associate.In addition to addressing these specific concerns, identify any potential tax problems orplanning ideas suggested by the facts. Be specific in describing the issues involved,give full citations to controlling law, and provide suggestions and/or alternatives tominimize risks and maximize opportunities.

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