question archive Megahurtz Enterprises, Inc
Megahurtz Enterprises, Inc
Subject:LawPrice: Bought3
Megahurtz Enterprises, Inc. ("Inc.") is a closely-held C corporation formed 20 years ago by Adam and Bea Hurtz, who are husband and wife, and Bea's wealthy uncle, C.D. Rom, to develop and manufacture multimedia entertainment products for personal computers. Inc. has 10,000 shares of common stock and 1,000 shares of nonvoting preferred stock outstanding. At Inc.'s formation, each of the founding shareholders contributed cash in exchange for Inc. common stock, which was the only class outstanding at the time. About ten years ago, when Inc. needed more paid-in capital, Adam Hurtz and C.D. Rom made additional cash contributions in exchange for 1,000 shares of nonvoting preferred stock. Inc. has been very profitable company and had $4 million of accumulated earnings and profits as of the beginning of the current year. Inc. also has substantial cash on hand and is in a position to borrow additional cash if necessary to finance a stock repurchase.
Five years ago, Adam and Bea began making gifts of some of their Inc. common stock to their son, Dan, and to a trust for the benefit of Dan's two children. Dan's wife, Hilary, serves as Trustee of the trust. Dan Hurtz has been active in the family business for several years and is currently serving as vice-president.
C.D. Rom died last month, and his substantial Inc. holdings are now held by his estate, the co-executors of which are Bea Hurtz and Local Bani. C.D.'s will bequeathed $200,000 cash (2% of his estate) to Bea and the residue to his children.
As of the beginning of the current year, Inc.'s common and preferred shares were held as follows:
| Common Stockholders | Shs. | Adj. Basis | F.M.V. |
| C.D. Rom Estate | 8,000 | $8,000,000 | $8,000,000 |
| Adam Hurtz | 800 | 80,000 | 800,000 |
| Bea Hurtz | 800 | 80,000 | 800,000 |
| Dan Hurtz | 300 | 30,000 | 300,000 |
| Children's Trust | 100 | 10,000 | 100,000 |
| 10,000 | $8,200,000 | $10,000,000 | |
| Preferred Stockholders | |||
| C.D. Rom Estate | 500 | 50,000 | 50,000 |
| Adam Hurtz | 500 | 50,000 | 50,000 |
| 1,000 | $100,000 | $100,000 |
Inc. is considering a redemption of all of its preferred stock. In addition, Adam and Bea are contemplating retirement and ultimately wish to shift ownership of Inc. to Dan and his family, and the Rom Estate wishes to diversify its holdings. Evaluate the tax consequences of the following alternative proposals to meet some or all of these goals:
(a) Inc. redeems 6,000 of the Rom Estate's common stock for $6 million cash and all of the Estate's preferred stock for $50,000 cash.
