Recommending an LLC taxed as a partnership, this Unit 2 memo for AC507 shows three founders a smaller formation gain and a first-year loss nobody suspends. Searches like "ac 507 unit 2 assignment example", "ac507 unit 2 sample" and "ac507 unit 2 example" land here.
What a finished AC507 Unit 2 entity selection memo looks like
Three pages addressed to the founders, recommendation first. The facts table lists each contribution: Nora's still and bottling line, basis [$90,000] and value [$250,000], with [$50,000] in cash paid back to her; Grant's [$200,000] in cash; Tessa's warehouse, value [$350,000] and basis [$270,000], carrying a [$150,000] mortgage. A [$300,000] bank loan funds the barrels. Part one runs those facts through Section 351 for either kind of corporation: Nora recognizes $50,000 of boot gain, and stock bases come to $90,000, $200,000 and $120,000. Part two runs the same facts through Section 721, where the cash to Nora becomes a disguised sale of a fifth of her equipment and only $32,000 of gain. Part three sets each owner's share of the projected loss against the basis each regime allows.
How a AC507 Unit 2 example is structured
Eligibility is confirmed in a paragraph before any arithmetic: three individual citizens, one class of stock contemplated, so S status stays available and all three regimes are priced. Formation comes next, in parallel blocks that share row labels. The corporate block applies Sections 351(b), 357(a) and 358; the partnership block applies Section 721, the disguised sale rule of Section 707(a)(2)(B) with its two-year presumption in the regulations, and Section 752 for the mortgage and bank loan, shared by profit percentages as the prompt directs. The loss block follows and carries the recommendation. Partnership bases of $222,000, $350,000 and $270,000 absorb a $140,000 loss per owner; S corporation stock bases leave $70,000 suspended under Section 1366(d); a C corporation keeps the whole loss as a carryforward. Section 704(c) and the facts that would reverse the choice close the memo.
All three forms remain open
Nobody is a nonresident, an entity or a second class of holder, so the memo keeps the S corporation in the comparison instead of discarding it on eligibility.
Boot under one regime, a sale under the other
The [$50,000] paid to Nora is boot under Section 351(b) and recognized in full, while under the partnership rules it buys a fifth of her equipment, producing $32,000 of gain.
Entity debt and owner basis
Section 752 adds a third of the mortgage and the barrel loan to each partner's basis; S corporation shareholders receive nothing for debt the corporation owes.
A loss in the opening year
Each owner's $140,000 share is deductible in full under Section 704(d) in the partnership column, partly suspended in the S column and trapped inside the C corporation.
Facts that would favor incorporating
Outside venture money, a public offering or a plan to retain profits for a decade would favor incorporating, and the memo says which of those facts would have to change first.
Where marks go in AC507 Unit 2
One set of facts, run honestly through every regime, is what separates strong Unit 2 memos in AC507. The weakest versions compare operating tax rates and skip formation, though the prompt supplies contributions so basis can be computed. Treating the cash paid to Nora as a tax-free partnership distribution misses the disguised sale regulations and understates her gain; treating it as fully taxable under the partnership rules overstates it. Crediting entity debt to S corporation shareholders, a common slip, erases the difference the loss block depends on. A recommendation that ignores the projected loss years reads as though written for a different business. Section 704(c) omitted, recapture character unmentioned, or a bank loan allocation with no citation each cost smaller amounts. A conclusion held back to the last page loses organization credit.
Get a AC507 Unit 2 example written to your instructions
Share every founder's contribution, including basis, value and any debt, and add the assignment wording for Unit 2 with its grading rubric. The memo tests eligibility, computes formation under each regime on those facts, and follows the first-year result to each owner. Delivery is 24-48h, and the opening custom sample carries no fee.
AC507 Unit 2 questions, answered
Why is Nora's cash a disguised sale only in the partnership column?
Because Section 351 has its own rule for money received with stock: it is boot, and gain is recognized up to its amount. Partnerships have no boot concept. Instead, Section 707(a)(2)(B) and its regulations treat a contribution of property followed within two years by a related distribution of cash as a sale in part, so Nora sells a fifth of the equipment and contributes the rest.
What character is Nora's gain?
Mostly ordinary. The still and bottling line are depreciable equipment, so gain up to the depreciation previously claimed is recaptured under Section 1245, whichever regime applies. The example states that in a sentence beside each gain figure and brackets the prior depreciation, since your prompt would supply it. A rubric that asks only for the amount recognized still rewards a memo that names the character correctly.
Does the example cover at-risk and passive loss limits?
It names them as the next gates. Basis is only the first test a partner's loss must pass; the at-risk rules of Section 465 and the passive activity rules of Section 469 follow, and Grant, who will not work in the distillery, is the owner most exposed to the second. The example flags that and leaves the full computation for a prompt that asks for it.