49. Richard plans to invest $100,000 for a 50 percent interest in a small business. His friend, Jack, will also invest $100,000 for the remaining 50 percent interest. They expect to generate a 10 percent before-tax return on their investment the first year. Richards marginal tax rate is 24 percent, and Jacks marginal tax rate is 32 percent. Their tax rate for capital gains and dividend income is 15 percent. They need to decide whether to establish the business as a partnership or a C corporation.

a) If they establish a partnership, compute the after-tax cash flow for each partner if each of them withdraws $4,000 of the profits from the business the first year. What is the amount of cash that remains in the partnership?

b) If they establish a C corporation, compute the after-tax cash flow for each shareholder if each of them receives a dividend of $4,000 from the profits of the business the first year. What is the amount of cash that remains in the C corporation?

c) What nontax factors should Richard and Jack consider in making this decision?

d) What you do recommend?

43. Sandle Corporation, an accrual-basis, calendar-year taxpayer, sold $15,000 of its products on account to Jim in November, year 1. In year 2, Jim declares bankruptcy and Sandle writes off the account as a bad debt. In year 3, Jim unexpectedly inherits a large sum of money and uses part of it to repay his creditors, including a $12,000 payment to Sandle Corporation.

1. What does Sandle Corporation report on its tax returns for years 1, 2, and 3?
2. How would your answers change if Sandle is a cash-basis taxpayer?