FASH 445 Lecture 39: Jaz - Advisory Board Assignment - Google Docs
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Tax Strategies for Business Planning andInvestment
Tax Planning Case II: Entity Selection
Weâve received an inquiry from a client and weâd like you todraft a memorandum indicating how we should respond to these clientinquiries. The inquiry concerns the formation of a business and ouranalysis of the impact various entity types might have on thebusiness.
Please format your memorandum to Identify significant tax andnontax issues or concerns that may differ across entity types anddiscuss how they are relevant to the choice of entity decision forthe clientâs business. Include a brief summary of the inquiry, youranalysis of the inquiry, the issues posed, any relevantcomputations and your recommendations. Please include yourcomputations directly in your memorandum and do not attach them ina separate Excel spreadsheet.
Please format the memorandum as follows:
MEMORANDUM
To: Eugene Kilo, Smith TaxConsultants
From: [Team members, provide your own titles]
Re: Various Tax Matters
Date: [Applicable Date]
Martha Taylor is currently employed by the Maryland Chamber ofCommerce. While she enjoys the relatively short workweeks, sheeventually would like to work for herself rather than for anemployer. In her current position, she deals with a lot ofsuccessful entrepreneurs who have become role models for her.Martha has also developed an extensive list of contacts that shouldserve her well when she starts her own business.
It has taken a while but Martha believes she has finallydeveloped a viable new business idea. Her idea is to design andmanufacture cookware that remains cool to the touch when in use.She has had several friends try out her prototype cookware and theyhave consistently given the cookware rave reviews. With thisencouragement, Martha started giving serious thoughts to makingâCool Touch Cookwareâ (CTC) a moneymaking enterprise.
Martha had enough business background to realize that she isembarking on a risky path, but one, she hopes, with significantpotential rewards down the road. After creating some initial incomeprojections, Martha realized that it will take a few years for thebusiness to become profitable. After that, she hopes the skyâs thelimit. She would like to grow her business and perhaps at somepoint âgo publicâ or sell the business to a large retailer. Thiscould be her ticket to the rich and famous.
Martha, who is single, decided to quit her job with the stateChamber of Commerce so that she could focus all of her efforts onthe new business. Martha had some savings to support her for awhile but she did not have any other source of income. Martha wasable to recruit Linda and Mike to join her as initial equityinvestors in CTC. Linda has an MBA and a law degree. She wasemployed as a business consultant when she decided to leave thatjob and work with Martha and Mike. Lindaâs husband earns around$300,000 a year as an engineer (employee). Mike owns avery profitable used car business. Because buying andselling used cars takes all his time, he is interested in becomingonly a passive investor in CTC. He wanted to get in on the groundfloor because he really likes the product and believes CTC will bewildly successful. While CTC originally has three investors, Marthaand Linda have plans to grow the business and seek more owners andcapital in the future.
The three owners agreed that Martha would contribute land andcash for a 30 percent interest in CTC, Linda would contributeservices (legal and business advisory) for the first two years fora 30 percent interest, and Mike would contribute cash for a 40percent interest. The plan called for Martha and Linda to beactively involved in managing the business while Mike would notbe.
The three equity ownersâ contributions are summarized asfollows:
Martha Contributed | FMV | Adjusted Basis | Ownership Interest |
Land (held as investment) | $120,000 | $70,000 | 30% |
Cash | $30,000 | ||
Linda Contributed | |||
Services | $150,000 | 30% | |
Mike Contributed | |||
Cash | $200,000 | 40% |
Working together, Martha and Linda made the following five-yearincome and loss projections for CTC. They anticipate the businesswill be profitable and that it will continue to grow after thefirst five years.
Cool Touch Cookware 5-Year Income and Loss Projections | ||||||||||||
|
With plans for Martha and Linda to spend a considerable amountof their time working for and managing CTC, the owners would liketo develop a compensation plan that works for all parties. Down theroad, they plan to have two business locations (in differentcities). Martha would take responsibility for the activities of onelocation and Linda would take responsibility for the other.Finally, they would like to arrange for some performance-basedfinancial incentives for each location.
To get the business activities started, Martha and Lindadetermined CTC would need to borrow $800,000 to purchase a buildingto house its manufacturing facilities and its administrativeoffices (at least for now). Also in need of additional cash, Marthaand Linda arranged to have CTC borrow $300,000 from a local bankand to borrow $200,000 cash from Mike. CTC would pay Mike a marketrate of interest on the loan but there was no fixed date forprincipal repayment.
Based on âMorgan: A case of Diabetesâ by Lisa Rubin and Clyde Freeman Herreid (National Center for Case Study Teaching in Science)
The Patient:
Morgan Water is a 27-year old Native American that lives on a reservation in Oklahoma. Nearly ¼ of Morganâs tribe has diabetes but she has no direct family history of diabetes, heart disease, or other serious conditions. She is however obese (BMI = 32) and leads a sedentary lifestyle. Morgan has been suffering from an increasing persistence of symptoms including unusual thirst, dizziness, blurred vision, and numbness in her right foot. The symptoms have been developing over several months but as she is planning her wedding she attributed them to nerves. She is finally persuaded to see her family doctor. Her non-fasting blood glucose level was elevated so the doctor has her return the next morning for a fasting blood sample so they could more accurately measure her blood glucose and insulin. Her blood results are below:
Test | Morganâs values | Normal range | Pre-Diabetic range | Diabetic range |
Plasma glucose, mg/dl | 260 | 70 -139 | 140 - 199 | ⥠200 |
Fasting glucose, mg/dl | 140 | ⤠99 | 100 - 125 | ⥠126 |
A1C, % | 7.6 | ~ 5 | 5.7 â 6.4 | ⥠6.5 |
Fasting Insulin, mIU/ml | 34 | 2 - 10 | 10 - 20 | ⥠20 |
The recommendation of Morganâs doctor was to improve her exercise, good nutrition, and weight loss. He recommends meeting with a nutritionist to assist Morgan in her weight loss goals. When Morgan got home and told her family the diagnosis they however had LOTS of suggestions on how she can lose weight. Below is a description of the advice given to her by three family members.
Best friend Savannah:
âYou know how Iâve been losing weight? Well, Iâve been on the Atkinsâ Diet. I heard about it on TV. Itâs great! You get to eat steak, chicken wings, and all the good stuff. All you have to do is limit carbohydrate intake. You should definitely give it a try. This diet has been around for years and it has worked for lots of people, including me.â
*Note: Atkinâs Diet recommends: 10% carbohydrates, 55% fats, 35% protein
Brother Alan:
âI think the best thing for you to do is exercise and stop eating all of that pizza and candy and food filled with fat. Our people never used to eat that junk. I say eat meals that are nutritionally balanced and high in fiber and low in refined sugars and saturated fats. And run a lot. Stop sitting around the house.â
Grandfather:
âMorgan, it is true that it is best to live in harmony and balance â to eat a nutritionally balanced diet that includes carbohydrates, proteins, and âgoodâ fats to meet your bodyâs needs. That is good. But look to your heritage. Our people were never overweight before we started eating âcivilizedâ food. Look to our native diet. I think you should look to traditional herbal remedies for help. What Alan says is true. Exercise is good. But it is sometimes not enough. Our people have always looked to natural medicine for cures. They will lift your spirits and energize you. Then you will lose weight and you will be healthy again. I hear the herbs from the diet shop are safe and good. But you must take them like the medicine label says. It canât hurt to try them.â
*Note: these herbal supplements Morganâs grandfather is recommending contain the herb
ephedra (ephedrine).
Question 5:
Given Morganâs metabolic state, what is the primary fuel source for her cells currently?
A. Carbohydrates (glucose)
B. Fats
C. Proteins
D. It is a balance of all three
Question 6:
Metabolic ketoacidosis is a common problem with diabetics, which is caused by which of the following?
A. Excessive oxidation of fatty acids, leading to an accumulation of ketone bodies in the blood.
B. Excessive oxidation of glucose, leading to an accumulation of ketone bodies in the blood.
C. Excessive oxidation of proteins, leading to an accumulation of ammonia in the blood.
D. Hyperglycemia.
Question 7:
Which weight loss suggestion is designed to achieve some level of ketosis?
A. Atkins Diet
B. Exercise
C. High fiber diet
D. Herbal treatments
Question 8:
One major side effect of the herbal supplement can be hot flashes and increased perspiration due to increased thermogenesis, what is the likely cause of the heat production?
A. Increasing the activity of phosphfructokinase-1.
B. Increasing the activity of the pyruvate dehydrogenase complex.
C. Increasing the activity of citrate synthase.
D. Increasing the activity of uncoupling proteins.
Question 9:
Would substituting fiber and complex carbohydrates (larger % cellulose) for the simple sugars and starches (high sucrose and amylose/amylopectin) help Morgan lose weight, why?
A. Yes, because complex carbohydrates like cellulose are largely indigestible so they pass through
the digestive tract without being absorbed.
B. Yes, cellulose contains less glucose residues than amylose or amylopectin.
C. Yes, because the fructose in sucrose is much more responsible for weight gain than the glucose.
D. No, because cellulose, amylose, and amylopectin are all composed of glucose so it doesnât
matter.
Question 10:
Which weight loss suggestion will lead to an increased need for gluconeogenesis?
A. Atkins Diet
B. Exercise
C. High fiber diet
D. Herbal treatments