Tax Advice

Memo about a tax advice

Scenario/Summary

After 20+ years of working for other firms, Penelope (Enrolled Agent, age 41), Mark (CPA, age 43), and John (CVA, age 65) want to leave the firms they are currently employed by and become their own bosses. Penelope specializes in taxes, Mark is the auditor, and John is a business valuation expert.

There are so many options available to how they can structure the new business(es).The appropriate business entity for any individual(s) will depend on their particular facts and circumstances.

You are a valued colleague and friend of this threesome, and they have come to you seeking advice on how to structure their new business. They have the knowledge to figure it out themselves, but are looking for the advice of an unbiased third party. Please consider the following tax and non-tax considerations as you recommend an entity choice to Penelope, Mark, and John.

Activity

Prepare a tax memo (900-word minimum; 1,200-word maximum) to Penelope, Mark, and John, addressing the entity selection issue and discussing the following tax and non-tax considerations, point by point:

Part I: Discuss the various forms of organization that are available to Penelope, Mark, and John.

Part II: Make your recommendation as to what form of organization you believe will be best, and be sure to explain the reasoning for your choice.

Part III: Discuss the tax consequences of contributing cash, property, and/or services to the new entity.

Part IV: Discuss, in detail, how this entity is taxed (if at all), and what filing requirements it has with the IRS.

Part V: Discuss how income and distributions may or will be allocated to Penelope, Mark, and John.

Part VI: Discuss, in detail, how the individuals are taxed (if at all) with respect to the net profits from this entity, and what filing requirements they will each have with the IRS.

Part VII: Discuss how Penelope, Mark, and John will calculate their “basis” in the new entity. Be sure to include the impact that debt has on basis, if any.

Part VIII: Limited Liability – Discuss the exposure that Penelope, Mark, and John’s personal assets will have to the debts and lawsuits of the entity that you have recommended.

You Decide: It’s your turn as a tax professional to decide on the best course of action from a tax perspective on these issues as presented.

For this memo, begin by restating the issue and numbering the considerations as shown above [i.e., I, II, III, and so forth]. Next, provide your recommendation and your explanation to each of the issues or considerations listed above; and discuss the tax rules that apply to the issue, which you gleaned from your tax research. Tax law includes IRC sections, regulations, court decisions, and other sources (if applicable). Be sure to conclude with a definitive answer on what entity they should choose.

*A template has been provided in Doc Sharing for your use in preparing this activity. Please use it!

Present your answer concisely (i.e., to the point) following the KISS principle, in a professional, grammatically correct, and spelling-error-free memo.

Citations are required. You must provide citations whenever you refer to the sources of tax law used in this memorandum. You may cite your sources in numbered footnotes, numbered endnotes, or in parentheses immediately after the sentence mentioning the cited source.

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