1. After working in accounting for fifteen years, you and two friends have decided, you would really like to start your own firm. Some of the initial consultations you have had in your meetings have brought up a number of issues. Please answer the following issues being brought up.

a. You are trying to decide what kind of entity you want to use for your business. You have the option of using the C-Corporation, Partnership and the S-Corporation. Which entity would you argue to use and provide at least three reasons in support of this choice and one potential problem you might have for this choice?

b. You all are trying to decide whether you want to use a cash method or accrual method of accounting for your business. Please provide three reasons in support of accrual methods and three in support of cash methods of accounting.

c. After discussion, the decision is to choose to operate as a C-Corporation. As a part of this organization, you all decide you want to set up a retirement plan for the company, so each partner can save for his or her retirement. Provide 3-5 sentences of discussion of the difference between the Roth 401k option and the traditional defined contribution plan.

d. After several years, your firm is rather successful and in an effort to expand, the company is trying to decide if it should keep the current 401k (defined contribution) plan or switch to a defined benefit plan. Provide 3-5 sentences of discussion making the argument of moving from a 401k plan to a defined benefit plan.

2. You have a client and they formed a corporation with 5 of their friends. All of the people were required to put in $50,000 or assets valued at the same into the company, but only 1 was going to work full time for the company. What is the tax effect to the contributors and what rate would they be taxed at for this transaction?

3. Gusto Cars, Inc. has been having a terrible year this year. In the current year, they are scheduled to make only $1.5 million net income, but the heads of the company realize this is primarily due to an accounting change costing them roughly 30 million in income. Sales are going well and the company expects to rebound from this going forward, however, Gusto has held a constant 3.5% payout on its dividend, and without a significant market drop, this means they will have to pay out roughly 5 million in dividends. They have an accumulated earnings and profit of 20 million. What will be the tax effect to shareholders assuming the entire dividend is paid out?

4. Assume the same facts above, but the company has no accumulated earnings and profits. Also assume all shareholders have sufficient basis in their stock.

5. A-Co, Inc has acquired a 40% interest in New-Co, Inc. as a result of its deal exiting out of the Northeastern market. New-Co, Inc. operates in the Southwest, where A-Co, Inc. is seeking to expand its operations of fast food chains. New-Co is expecting to pay out dividends in at around $1 million each year, as it has done so in previous years.

a. What is the dividends received deduction (percentage and actual amount assuming he 1 million dividends holds).

b. What code section is the primary source of the dividends received deduction?