Carrie Carson: Carrie is a 60-year-old tai chi instructor living in Santa Fe, New Mexico. For many years, she practiced in Hollywood, and because of an acting background, she developed a clientele including many celebrities. About five years ago, when her husband died, she moved to Santa Fe to escape life in the fast lane, and many of her celebrity clients still see her on a regular basis. The celebrities rave about Carrie and her techniques and endorse her for free. At the encouragement of her celebrity friends, Carrie has developed a unique set of products that she would like to market, but she readily admits she has no marketing expertise.

David Duncan: Dave is a 50-year-old marketing expert. He started his marketing career in the home office of a major chain of brick-and-mortar stores 25 years ago; over the years, he expanded his role within that company to include management of internet marketing operations. He retired two years ago when that company was acquired, and he moved to Santa Fe with his children. As a result of the acquisition, Dave received a large severance package. He became a client of Carrie a year ago. They have become good friends and look forward to working together. Dave is divorced and has two dependent children, one in college in Boston and the other in high school in Santa Fe.

Naomi Nelson: Naomi is the 30-year-old manager of an auto parts warehouse in Santa Fe. She enjoys her job but has gone as far as she can with that company. Naomi is looking for an opportunity with a startup company and got to know Carrie through mutual friends. Naomi is single and has no children.

Andrew Anderson: Andy is a 65-year-old recently retired airline pilot. Andy has been a lifelong fan of yoga and tai chi and has been going to Carrie’s classes almost since the day Carrie moved to Santa Fe. Andy and his wife have always been prudent managers of their money, and they have a substantial net worth. Andy receives military and airline pension income, plus his wife is a successful veterinarian and continues to practice. Andy and his wife are interested in investing cash to help Carrie’s business expand rapidly, and Andy would like to work at least part time for the business. Andy and his wife have three grown children that are independent.

Carrie is presently operating as a proprietorship grossing $200,000 a year and netting $100,000 a year after expenses. She has designed her line of clothing and other wearable gear, plus DVDs and other products suitable for meditation, practicing tai chi, and similar activities. She has obtained copyright protection for her creative work to the extent allowed by law.

Carrie does not have any inventory at the present time but plans to acquire inventory and begin marketing and selling her products shortly after forming the new entity. Carrie does not plan to manufacture her products. She will contract that activity out to manufacturing companies recommended by her celebrity friends experienced in the marketing of their own personal lines. In addition, one of Carrie’s closest friend’s business managers has agreed to offer his services as a consultant to help Dave adapt his skill set to marketing Carrie’s line of products.

Dave has mapped out a business plan calling for modest sales and no or little profit in the first year, but once things catch on, he projects considerable growth and profit potential as follows:

Year Sales Net Income
1 $1 million None
2 $5 million $500,000
3 $15 million $2 million
4 $30 million $5 million
5 $50 million $10 million

Carrie, Dave, Naomi, and Andy all plan to become owners of the business in the following ownership percentages, but they are open to your suggestions:
• Carrie, 50%
• Dave, 20%
• Naomi, 5%
• Andy, 25%

Carrie will be contributing her designs, good will, and contacts willing to endorse her products for free.

Dave and Naomi will be contributing their hard work and expertise.

Andy will be contributing $500,000 to cover the cost of inventory and initial marketing and other operating expenses.

Because the products will be marketed to customers in connection with a physical activity, all four future owners are concerned about potential product and other liability and want to make sure the choice of business entity protects them from personal liability should an adverse event result from product use.

They plan to name the business Tai-Ga.

The Tai-Ga organizers (hereafter, “the Organizers”) want your professional advice regarding whether they should form a partnership, an S corporation, a C corporation, or some other type of business entity.

First Meeting: In the first meeting, you are tasked with preparing a memorandum to the Organizers recommending a type of business entity and how it should be capitalized. The form that you recommend for Tai-Ga will be based on the tax and liability concerns communicated to you by the Organizers. In your memorandum, you will address those concerns by discussing the tax and limited liability effects of the different entity options available to the Organizers, and you will recommend what you feel is their best choice based on that discussion. Assume that the organizers are concerned about minimizing their total tax impact (the sum of the personal and entity tax cost) but even more concerned about minimizing personal liability. ATTACHED (WORKING PAPER)

Second Meeting: The second meeting is about two weeks after the first meeting. The Tai-Ga owners have completed all the legal steps necessary to set up the new business using the entity form that you recommended during the first meeting. In the second meeting, you will explain the tax elections and other accounting matters that must be considered prior to commencing operations. You will discuss the options available to the Organizers and make specific recommendations. ATTACHED (WORKING PAPER)

Third Meeting: The third meeting will be five years after the first two meetings. The business has been successful and Dave’s business projections have been substantially met. Based on a net income multiplier of 10:1, TaiGa is now worth $100 million. Andy has become seriously ill and wants to sell his stock and withdraw from the business. Two persons have expressed interest in buying Andy’s stock, but issuing new stock is also a possibility. One person is the company’s CFO, Brian Bolton. Brian came on board about six months after Tai-Ga commenced operations and has been instrumental in managing the financial aspects of the company’s explosive growth. Brian has expressed interest in acquiring up to 2% ownership in Tai-Ga via compensatory stock options. The other investor is Acme Manufacturing, one of Tai-Ga’s major suppliers: They wish to acquire up to 10% ownership. They require your input on the best way to approach the restructuring.

Over the last five years, Tai-Ga’s total net income has amounted to $17.5 million after reasonable salaries were paid out to the owners over the years. Of that $17.5 million, $5 million has been invested in inventory and other operating assets. The remainder ($12.5 million) is in cash. The owners have expressed interest in distributing $2 million of the cash in some fashion, and they want you to consider that in your memo. The remainder of the cash will be retained in the business to fund future growth.

Additionally, in light of Andy’s situation, the existing stakeholders would like you to research estate planning for their situations and prepare a memorandum outlining your recommendations for each member.

A. Analyze a client scenario to determine appropriate factors in estate planning for maximizing the tax benefit of the stakeholder. LABEL: FACTORS IN ESTATE PLANNING B. Formulate a recommendation to the client based on research of IRS and other resources. PLEASE LABEL: RECOMMENDATION C. Interpret research of IRS and other resources to determine relevance to all other stakeholder scenarios. PLEASE LABEL: RESEARCH D. Determine the appropriate information to advise each of the stakeholders, then communicate the impact of research results by composing a brief recommendation memorandum to the stakeholders.



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