TAX 660 Guidelines and RubricOverview
Working as an accounting associate in a financial organization requires the ability to apply tax and accounting knowledge in unique
ways. Being able to identify issues and communicate them effectively to team members and clients is essential for any financial
career working in a privately held enterprise or working with privately held clients. The final project for this course involves
researching relevant tax code and creating of a set of memorandums to advise a hypothetical group of individuals; you will organize,
operate, and ultimately restructure a merchandising business.
In this assignment, you will demonstrate your mastery of the following course outcomes:
• Evaluate tax consequences related to various elements of business formation for advising stakeholders on the most
advantageous organizational structure.
• Determine appropriate tax strategies associated with operating a multijurisdictional business for advising stakeholders on
merchandising methodologies.
• Assess the tax costs and benefits associated with restructuring a business to recommend appropriate tax strategies
based on relevant tax law.
• Propose effective strategies in estate planning for maximizing the tax benefit of stakeholders.
• Communicate key considerations to stakeholders for use in making sound tax-oriented business decisions based on
chosen strategy.
Prompt
You will assume the role of tax advisor for a company made up of four stakeholders. In this case study, each stakeholder brings
different assets and tax situations to the table. You must design the appropriate business structure for the company as a startup,
advise tax solutions when the business is in operation, and counsel a tax strategy for each stakeholder during a restructuring. Your
advice will be communicated in a series of memorandums for each scenario.
**
Specifically, the following critical elements must be addressed:
I.
Establishing the Business
A. Explain the general tax advantages and disadvantages of each form of business. Include a discussion of how
each business form addresses owner concerns related to personal liability, return on investment, and tax
costs related to compensation.
B. Justify your choice of form of business entity for this venture based on stakeholder requirements for
maximizing tax outcomes of business owners. Determine tax implications for your investors related to
various investment options, including calculating the tax benefits/costs and identifying relevant tax law,
code, and regulations.
C. Make a recommendation for the capital structure of the business, including 1) the value assigned to the
organizers’ equity accounts versus debt payable to the organizers and 2) each of the organizers’ cost basis
in Tai-Ga.
D. Compose a memorandum to stakeholders, including an executive summary of your recommendation and a
detailed support section.
II.
Operating the Business
A. Determine the appropriate inventory cost flow assumption for a merchandising business.
B. Determine the appropriate overall business accounting method (cash, accrual, hybrid).
C. Make a recommendation for the appropriate depreciation method and asset lives, including whether or not to
make use of the availability of bonus depreciation under §168(k)
D. Determine the appropriate fiscal year end for a recommended business entity.
E. Explain the tax implications related to multijurisdictional operations of a business, including interstate and
international considerations.
F. Compose a memorandum to stakeholders, including an executive summary of your recommendation and a
detailed support section.
III.
Restructuring the Business
A. Determine tax consequences of the different distribution/contribution options in a business restructuring:
1.
Identify relevant tax law for restructuring the business.
2.
Calculate the tax costs of a restructuring plan.
3.
Calculate the tax benefits of a restructuring plan.
B. Compose a memorandum to stakeholders outlining restructuring recommendations, including an executive
summary of your recommendation and a detailed support section based on research and analysis of
relevant information.
IV.
Estate Planning
A. Analyze a client scenario to determine appropriate factors in estate planning for maximizing the tax benefit of
the stakeholder.
B. Formulate a recommendation to the client based on research of IRS and other resources.
C. Interpret research of IRS and other resources to determine relevance to all other stakeholder scenarios.
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.
•
You will submit a recommendation on the appropriate form for the new business, called Tai-Ga.
•
You will submit a professional memorandum that provides recommendations for key operating decisions.
•
You will consider the tax and nontax consequences of transactions involving stock or ownership as you advise Tai-Ga on
restructuring the entity five years after formation of the business.
Project Scenario Narrative
For the final project, imagine you are working as a senior tax advisor at a midsize CPA firm. You are approached by a group of four individuals interested in expanding an
existing business. Brief background on the individuals and the expertise they are bringing to the proposed business follows:
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
1
$1 million
Net Income
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.
This project will consist of four memorandums produced prior to three meetings with the Organizers.
I.
First Meeting (Establishing the Business)
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.
Specifically, the following critical elements must be addressed:
Create a memorandum for stakeholders with an executive summary using logical reasoning based on your tax research to explain why the client should choose your
recommended business entity.
Following the executive summary, provide a general discussion of the tax advantages and disadvantages for each of the entity options (C corp, S corp, partnership, LLC)
available to Tai-Ga: Include a discussion of how each business form addresses owner concerns related to personal liability, return on investment, and tax costs related
to compensation.
Next, provide the details of your specific recommendation for a form of business as it relates to Tai-Ga by doing the following:
Describe how your choice of business is best for addressing stakeholder concern.
Provide a detailed explanation of tax implications associated with your recommendation in terms of tax benefits and costs. Include calculations.
Include your interpretation of the tax law pertaining to the form of business entity you recommended and how the law helps Tai-Ga maximize tax outcomes. Reference
appropriate tax code and regulations.
Make a recommendation for the capital structure of the business, including:
Value assigned to the organizers’ equity accounts versus debt payable to the organizers.
Each of the organizers’ cost basis in Tai-Ga
II.
Second Meeting (Operating the Business)
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.
Specifically, the following critical elements must be addressed:
Create a memorandum to stakeholders with an executive summary using logical reasoning based on your tax research to explain why the client should adopt your
recommendations for structuring business operations.
Make a recommendation for the appropriate inventory cost flow assumption for a merchandising business.
Make a recommendation for the appropriate overall business accounting method (cash, accrual, hybrid).
Make a recommendation for the appropriate depreciation method and asset lives, including consideration of Section 179.
Make a recommendation for the appropriate fiscal year end for your recommended business entity.
Explain the tax implications related to multijurisdictional operations of a business, including interstate and international considerations.
III.
Third Meeting (Restructuring the Business)
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.
Specifically, the following critical elements must be addressed:
Compose a memorandum that includes an executive summary and addresses the following:
Whether a change in the form of the entity is needed to facilitate the restructuring (If no change is needed, state so in the recommendation.)
Andy’s options and your recommendation for ending his ownership interest with Tai-Ga
Tai-Ga’s options and your recommendation for adding Brian and Acme as new owners.
The capital structure (debt vs. equity) of your restructuring recommendation
Justify your recommendation with a discussion of relevant tax law and regulations.
Calculate the tax costs of your recommendation for the individual taxpayers and the entity.
Calculate the tax benefits of your recommendation for the individual taxpayers and the entity.
IV.
Estate Planning
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.
B.
Formulate a recommendation to the client based on research of IRS and other resources.
C.
Interpret research of IRS and other resources to determine relevance to all other stakeholder scenarios.
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.
You will submit a recommendation on the appropriate form for the new business, called Tai-Ga.
You will submit a professional memorandum that provides recommendations for key operating decisions.
You will consider the tax and nontax consequences of transactions involving stock or ownership as you advise Tai-Ga on restructuring the entity five years after formation
of the business.
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