| Course | AC507 Business Taxation and Strategies |
|---|---|
| Unit | Unit 2 |
| Paper type | Entity selection memo |
| Length | About 760 words, 5 pages double-spaced |
| Format | APA 7 student paper |
| School | Purdue University Global |
| Program | MS in Accounting |
| Updated | October 2026 |
Free sample paper for AC507 Unit 2
A Still, a Warehouse and Two Years of Aging Barrels: A Unit 2 Entity Selection Memo for a Craft Distillery
[Student Name]
Purdue University Global
AC507: Business Taxation and Strategies
Unit 2 Entity Selection Memo
[Instructor Name]
[Date]
The founders, the distillery and every figure are composite; the statutes and publications cited are real; this is coursework analysis, not tax advice.
Memorandum
To: Nora, Grant and Tessa, founders From: Tax Analyst Date: January 12, 2027 Re: Choosing the distillery's entity
Organize as an LLC and let it be taxed under the partnership rules. It lets each of you deduct your share of the expected $420,000 loss in the first two years, which a C corporation cannot pass through and an S corporation would partly suspend. Change one feature of the plan: instead of paying Nora $50,000 at formation, pay it as a guaranteed payment for her work setting up the still, or defer it beyond two years.
Facts
Nora contributes a still and bottling line with a basis of $90,000 and a value of $250,000, and the plan pays her $50,000 in cash. Grant contributes $200,000 in cash. Tessa contributes a warehouse worth $350,000 with a basis of $270,000; the business will take over the $150,000 mortgage on it. A $300,000 bank loan funds barrels and grain. Each founder ends with a one-third interest worth $200,000. The first two years will produce whiskey aging in barrels and an expected combined loss of $420,000.
Part 1: A Corporation
The three founders together control more than 80 percent of the stock immediately after the transfer, so the exchange qualifies for nonrecognition (Transfer to corporation controlled by transferor, 26 U.S.C. § 351, 2018). Nora's $50,000 of cash is boot: her taxable gain is capped at the boot, so $50,000 of her $160,000 realized gain is taxed now. Her stock basis is $90,000: her $90,000 asset basis, plus $50,000 of gain, less $50,000 of cash. Tessa's mortgage, $150,000, is less than her $270,000 basis, so it triggers no gain; her stock basis is $120,000. Grant's is $200,000. The corporation takes the still at $140,000 and the warehouse at $270,000.
As a C corporation, the $420,000 loss stays inside the company as a net operating loss, usable only against future corporate income and only up to 80 percent of it in any year. As an S corporation, the loss passes through, but each founder can deduct only up to the basis of her stock and any loans she makes to the company. The bank loan to the company adds nothing to stock basis. Each founder's share of the loss is $140,000; Nora's basis is $90,000 and Tessa's $120,000, so $50,000 and $20,000 of their losses would be suspended.
Part 2: A Partnership
Contributions to a partnership are generally tax-free to both sides (Nonrecognition of gain or loss on contribution, 26 U.S.C. § 721, 2018). Two features need attention.
Nora's $50,000 is a problem here too. A contribution of property followed within two years by a related cash distribution is presumed to be a disguised sale (Internal Revenue Service, 2025). She would be treated as selling one-fifth of the still, $50,000 of its $250,000 value, against one-fifth of its basis, $18,000, recognizing $32,000 of gain. Structuring the payment as a guaranteed payment for services, or deferring it, avoids that.
Tessa's mortgage is relieved, which counts as a cash distribution of $150,000, but she is also allocated a third of the partnership's liabilities, the mortgage and the bank loan, $450,000 in all, or $150,000. The two offset, so she recognizes nothing and her outside basis is $270,000. Grant's basis is $350,000, his cash plus his share of the debt. Nora's is $222,000, or $240,000 if the disguised sale is avoided.
Partnership debt increases each partner's basis while corporate debt increases no shareholder's, so the same $300,000 bank loan that leaves Nora's S corporation losses partly suspended gives every partner enough basis to deduct her full $140,000 share.
Part 3: Using the Loss
With a partnership, each founder's $140,000 share of the loss is deductible against other income, once the at-risk and passive loss limits are cleared. All three will work in the business, so the losses should be nonpassive. Recourse treatment of the bank loan should be confirmed so that the at-risk rules do not limit them.
Later Changes
If the distillery later raises outside equity from investors who want stock, the LLC can convert to a corporation in a tax-free exchange. The partnership form gives up nothing that cannot be added later (Internal Revenue Service, 2024).
References
Internal Revenue Service. (2024). Partnerships (Publication 541). U.S. Department of the Treasury.
Internal Revenue Service. (2025). Instructions for Form 1065: U.S. return of partnership income. U.S. Department of the Treasury.
Nonrecognition of gain or loss on contribution, 26 U.S.C. § 721 (2018).
Transfer to corporation controlled by transferor, 26 U.S.C. § 351 (2018).
AC507 Unit 2 instructions, in plain terms
Unit 2 of AC507 asks you to recommend an entity for a new business after testing the formation rules. List each owner's contribution with basis, value and any liabilities or cash received. Apply the corporate formation rules first: control, boot, liabilities transferred, and the resulting stock and asset bases. Then apply the partnership rules: nonrecognition, disguised sales, liability shifts and outside basis. Compare how each form treats the expected early losses, including basis limits for S corporation shareholders and the trapped losses of a C corporation. Recommend a form, adjust any feature of the plan that creates avoidable tax, and note how the choice could change later. Write to the owners, recommendation first. Support the analysis with the formation statutes and IRS publications, referenced in APA 7.
How the AC 507 Unit 2 example is put together
The sample opens with its recommendation and the change to Nora's cash payment. A facts section values each contribution to a one-third interest worth $200,000. Part one applies section 351: Nora recognizes $50,000 of boot gain with a $90,000 stock basis, Tessa's mortgage is below her basis, and S corporation basis would suspend $50,000 and $20,000 of losses. Part two applies section 721: Nora's cash is presumed a disguised sale producing $32,000 of gain, and Tessa's mortgage relief is offset by her share of $450,000 of partnership debt. The highlighted sentence explains why partnership debt adds basis. Part three addresses at-risk and passive limits, and a final section notes conversion later.
Where the points sit in the AC507 Unit 2 rubric
Entity selection memos in AC507 earn points for accurate formation analysis under both regimes and a recommendation that follows from it. Graders check control, boot, liability relief and resulting bases under section 351, and nonrecognition, disguised sale exposure and liability allocation under the partnership rules. The rubric rewards students who connect basis to loss use and recognize that entity debt increases a partner's basis but not a shareholder's. Adjusting the plan to avoid unnecessary gain earns significant credit. Recommendations should address later changes, such as outside investors. Memos that compare forms only on liability protection, or that ignore the planned cash distribution, miss the unit's purpose. Clear memo structure and APA 7 references complete the work.
AC507 Unit 2 help from the desk
Weak Unit 2 memos discuss legal liability and paperwork and never apply the tax rules. Others apply section 351 correctly but treat partnership formation as automatically tax-free, missing the disguised sale. Liability relief is treated as gain without netting the partner's share of entity debt. S corporation loss limits are overlooked, so the memo assumes losses pass through freely. The recommendation keeps the cash payment in a form that triggers gain. Later conversion is not considered. If your section's founders contribute different property or plan different financing, a writer can run both regimes on your facts.
Get an 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. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.
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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.
Where can I find a free AC507 Unit 2 sample paper?
This page holds a full AC507 Unit 2 entity selection memo for three founders of a composite craft distillery, with section 351 and partnership formation analysis, loss use under each form and APA 7 references.
Why recommend an LLC over an S corporation here?
Because the $300,000 bank loan adds to each partner's basis but not to S corporation stock basis. As partners, all three founders can deduct their $140,000 loss shares; as shareholders, two would have losses suspended.