1One of CTCs biggest customers is in China. How can they structure their business to sell their products in China effectively? List Tax
2- Daisy & Kesha What are the tax perspectives specific to the owner/operators?
- Aryan What are the tax perspectives specific to the early stage investor?
- Tax Advisor What would your advice be if you were a tax advisor and CTC was your client?
- China Customer What are your tax perspectives as the Chinese customer?
- IRS Officer You selected CTC for audit. What are some of your areas of concern?
Daisy Taylor has developed a viable new business idea. Her idea is to design and manufacture cookware that remains cool to the touch when in use. She has had several friends try out her prototype cookware and they have consistently given the cookware rave reviews. With this encouragement, Daisy started giving serious thought to starting up a business called "Cool Touch Cookware" (CTC). Daisy understands that it will take a few years for the business to become profit- able. She would like to grow her business and perhaps at some point "go public" or sell the business to a large retailer. Daisy, who is single, decided to quit her full-time job so that she could focus all of her efforts on the new business. Daisy had some savings to support her for a while but she did not have any other source of income. She was able to recruit Kesha and Aryan to join her as initial equity investors in CTC. Kesha has an MBA and a law degree. Kesha was employed as a business consultant when she decided to leave that job and work with Daisy and Aryan. Kesha's husband earns close to $300,000 a year as an engineer (employee). Aryan owns a very profitable used car business. Because buying and selling used cars takes all his time, he is interested in becoming only a passive investor in CTC. He wanted to get in on the ground floor because he really likes the product and believes CTC will be wildly successful. While CTC originally has three investors, Daisy and Kesha have plans to grow the business and seek more owners and capital in the future. The three owners agreed that Daisy would contribute land and cash for a 30 percent interest in CTC, Kesha would contribute services (legal and business advisory) for the first two years for a 30 percent interest, and Aryan would contribute cash for a 40 percent interest. The plan called for Daisy and Kesha to be actively involved in managing the business while Aryan would not be. The three equity owners' contributions are summarized as follows: Daisy Contributed FMV Adjusted Basis Ownership Interest $70,000 30% Land (held as investment) Cash Kesha Contributed $120,000 30,000 150,000 Services Aryan Contributed Cash 200,000 Working together, Daisy and Kesha made the following five-year income and loss projections for CTC. They anticipate the business will be profitable and that it will continue to grow after the first five years. Cool Touch Cookware 5-Year Income and Loss Projections Year Income (Loss) U AWN- $(200,000) (80,000) (20,000) 60,000 180,000 With plans for Daisy and Kesha to spend a considerable amount of their time working for and managing CTC, the owners would like to develop a compensation plan that works for all parties. Down the road, they plan to have two business loca- tions (in different cities). Daisy would take responsibility for the activities of one location and Kesha would take responsibility for the other. Finally, they would like to arrange for some performance-based financial incentives for each location. To get the business activities started, Daisy and Kesha determined CTC would need to borrow $800,000 to purchase a building to house its manufacturing facilities and its administrative offices (at least for now). Also, in need of additional cash, Daisy and Kesha arranged to have CTC borrow $300,000 from a local bank and to borrow $200,000 cash from Aryan. CTC would pay Aryan a market rate of interest on the loan but there was no fixed date for principal repayment. Cool Touch Cookware (CTC) has been in business for about 10 years now. Daisy and Kesha are each 50 percent owners of the business. They initially established the business with cash contributions. CTC manufactures unique cookware that remains cool to the touch when in use. CTC has been fairly profitable over the years. Daisy and Kesha have both been actively involved in managing the business. They have developed very good personal relationships with many customers (both wholesale and retail) that, Daisy and Kesha believe, keep the customers coming back. On September 30 of the current year, CTC had all of its assets appraised. Below is CTC's balance sheet, as of September 30, with the corresponding appraisals of the fair market value of all of its assets. Note that CTC has several depreciated assets. CTC uses the hybrid method of accounting. It accounts for its developed very good pand Kesha believe, keep thad all of its as gross margin-related items under the accrual method and it accounts for everything else using the cash method of accounting. Assets Adjusted Tax Basis FMV $150,000 15,000 300,000 100.000 Cash Accounts receivable Inventory* Equipment Investment in XYZ stock Land (used in the business) Building Total assets Liabilities $150,000 20,000 90,000 120,000 40,000 80,000 200,000 $700,000 120,000 70,000 180,000 $935,000+ Accounts payable Bank loan Mortgage on building Equity Total liabilities and equity $ 40,000 60,000 100,000 500,000 $700,000 *CTC uses the LIFO method for determining the adjusted basis of its inventory. Its basis in the inventory under the FIFO method would have been $110,000. *In addition, Daisy and Kesha had the entire business appraised at $1,135,000, which is $200,000 more than the value of the identifiable assets. From January 1 of the current year through September 30, CTC reported the following income: Ordinary business income $530,000 Dividends from XYZ stock 12,000 Long-term capital losses 15,000 Interest income 3,000 Daisy and Kesha are considering changing the business form of CTC
