Bob has a very successful used car business located at 210 Ocean View Drive

Bob has a very successful used car business located at 210 Ocean View Drive in
Pensacola, Florida. Last year, you filed a Schedule C for Bob that had $1,200,000 in
taxable income. The business will have an income growth rate of 10% per year over
the next several years. Bob’s personal wealth, including investments in land, stocks,
and bonds, is about $14,000,000. Last year, he reported interest income of $20,000
and dividend income of $6,000. The $14,000,000 includes land worth $9,000,000 that
Bob bought in 1966 for $450,000. The stocks and bonds have a tax basis of
$1,200,000 and they are currently worth $5,000,000. All of the investments have been
owned for more than a year. In addition to his investments, Bob paid $140,000 for his
home in 1972 and it is now worth $600,000. The used car business is currently valued
at $53,000,000 including the land and building, which are worth $41,000,000. Bob’s
tax basis in the land and building is $2,000,000 and $400,000, respectively. The
inventory is worth $12,000,000, with a cost basis of $5,000,000; the remaining assets,
which include office furniture and equipment, make up the remainder of the
business’s total value. The office furniture and equipment are fully depreciated. Bob
wants your professional advice regarding whether he should continue to operate as a
sole proprietor or convert the business to a partnership, an S corporation, or a C
corporation. Based on one of the business entities selected, Bob wants to include
Mandy—his daughter—in the business as an owner and manager with a possibility of
40% interest. One of his concerns is what would happen to his business after he
passes away.
Mandy’s personal tax information is as follows: Mandy Jones DOB: June 30, 1990
SSN: 999-99-9999 Marital Status: Single Home Address: 5990 Langley Road,
Pensacola, FL 35203

Question
A. Use logical reasoning based on your tax research to explain why the client
should choose your recommended business entity. Consider referencing
appropriate tax code and regulations.

B. Defend your business entity recommendation by describing the accounting method.
Consider the advantages and disadvantages of the business entity based on the
following: 1. Cash basis vs. accrual 2. The cost to prep the returns 3. The tax benefits
4. The limited liability protection 5. Employee benefits

C. Interpret the tax law pertaining to the type of business recommended and justify
your recommendation using details consistent with tax law, code, and regulations.

D. Explain the tax effect based on providing $180,000 per year for the client’s salary
and $70,000 per year for his daughter’s salary if they withdraw cash from the business
or pay dividends as appropriate.

E. Justify the percentage of ownership the client’s daughter should have in the
business based on the type of business entity recommended. Consider the tax law in
reference to the recommendation and how the decision will affect the daughter’s tax
return.

F. Create a detailed tax planning proposal explaining how the client’s family can
experience tax savings should the client pass away. Cite relevant governing rules and
regulations.

G. Illustrate a strategic plan that addresses the need for a will in handling the estate.
Detail what happens to the business, land, and investments consistent with tax codes
and regulations. Consider extending the plan to address the client’s estate tax, trust,

and charitable contributions while minimizing estate tax.
H. Recommend estate planning strategies consistent with tax codes and regulations
for the purpose of reducing the taxable estate. Be sure to include gifting property to
heirs in your response.

I. Illustrate the best course of action if the client decides to leave the business in three
years. Provide some advice to him should he decide to gift the business to his
daughter or transfer the assets or common stock to her, depending on the business
entity you have selected.

J. Illustrate the best course of action if the client wishes to sell the business. Consider
the tax consequences with regard to capital gains and losses, ordinary income issues,
and selling an existing operating business.

K.Compare and contrast the advantages and disadvantages of the sole proprietorship,
the partnership, the S corporation, and the C corporation as a tax vehicle that could
meet the client’s need for accounting information about the business. Consider
providing justification for why the client would not necessarily choose the other
business entities.

L.Summarize the alternative involving the possibility of liquidating the business using
rationale based on tax research, codes, and regulations.

M. Summarize the alternative of transferring the business activity, providing
justification based on tax research, codes, and regulations.

Appendix:
A. Prepare Bob’s Form 1040 with the appropriate tax schedules and Mandy’s
Form 1040 (based on the salary he wanted to pay her, $70,000 per year).
Assume that you are filing the tax returns using sole proprietorship for the

business entity and treating Mandy as an employee, regardless of your initial
recommendation for this client.
B. Prepare the appropriate forms in the event that the client decides to convert the
business to a partnership, an S corporation, or a C corporation based on your
recommendation. Also, include the tax effect, if any, of the money that the client and
his daughter are taking from the business for their personal expenses. Include the
owners’ personal 1040 forms as well.

C. Justify your recommendation using schedules and tax forms you completed by
explaining how the forms and schedules result in the best economic solution for the
client consistent with IRS code and regulations.