Taxation of Business

On January 1, 2011, Moses, Ethan, Christie and Rodney formed
Butterfly, Inc., a manufacturing company to be taxed as a Subchapter C
corporation. Moses contributed (i) cash in the amount of $100,000, and (ii)
equipment having a basis of $120,000 and fair market value of $125,000 in
exchange for 225 common, voting shares of the corporation. Ethan contributed a
building with a basis of $100,000 and fair market value of $125,000 in exchange
for 125 common, voting shares of the corporation. Christie contributed $25,000
in cash in exchange for 25 commons, voting shares of the corporation. Rodney
contributed a capital asset having a basis of $15,000 and fair market value of
$25,000 in exchange for 25 common, voting shares of the corporation. It should
be noted that Moses is the biological father of Ethan and the adoptive father
of Christie. Rodney is unrelated to Moses, Ethan or Christie. 

During 2011, Butterfly, Inc. had earnings and profits from
operations of $50,000. No distributions were made to the shareholders during
2011, however, on December 31, 2011, the corporation redeemed 25 shares of Moses’s
shares for $30,000 in cash.

During 2011, Butterfly, Inc. had earnings and profits from
operations of $125,000. On December 31, 2012, the corporation made a
distribution to the shareholders in the amount of $200 per share.

During 2013, the corporation had earnings and profits from
operations of $95,000, however, no distributions were made to the shareholders
during 2013.

On January 1, 2014, the corporation redeemed the remaining
200 shares of Moses in exchange for $150,000 in cash and the equipment
contributed by Moses (then having a fair market value of $150,000). During 2014,
the corporation had $5,000 earnings and profits from operations (exclusive of
any gain on the distribution of the equipment to Moses, but inclusive of any
tax liability of the corporation relating to such distribution). On December
31, 2014, the corporation made a distribution to the remaining shareholders in
the amount of $300 per share.

On January 1, 2015, the Alabama Group acquired all of the
shares of the Butterfly, Inc. from Ethen, Christie and Rodney for $1,250 per
share.

Assume that (i) no cash distributions were made to any
shareholder, except as provided herein, (ii) all earnings and profits generated
during the years of operation resulted from cash transactions out of the
corporation’s operations, (iii) no depreciation occurred on any asset for any
year, and (iv) the fair market value of the assets remained the same at all
times, except as provided herein. Discuss, in detail, the implications to all
parties (inclusive of the corporation) of each transaction identified in the
above fact pattern.

N/B: Answer should be at least 10 pages.

Substantiate analysis and calculations with IRS Code
Sections.