1. A written document that would be representative of a memo that you would provide to a client file.
   1. The specific facts of the taxpayers' situation.
   2. Issue and conclusions reached
   3. Detailed analysis with citations listed of relevant authorities for the conclusions provided. Note cites should be authoritative (i.e., Internal Revenue Code, Regulations, Case Law, IRS rulings, etc.). Although you may find them helpful in developing your analysis, please do not cite commentary from CCH, RIA, opinion articles, textbooks, etc. as authority for your memo.

Facts of The Case

Individuals Rutsey, Lifeson, Peart and Lee started their business on January 1, 2018, manufacturing drum sets, bass guitars, and electric guitars. To start the business, the four individuals formed a corporation pursuant to the laws of Delaware and named the company Rush Band Instruments, Inc. (DBA "RBI"). Lee, Lifeson and Peart each contributed $100,000 cash to RBI and Rutsey contributed 500 shares of publicly traded ABC stock worth $100,000. Rutsey's shares of ABC stock represented less than 5% of the total shares of ABC stock outstanding. For their contributions, each individual received 100 shares of RBI common stock.Rutsey's basis in the ABC stock was $80,000 at the time of the contribution. Rutsey had owned the stock since 2016 when ABC went public in an initial public offering.

Upon inception, RBI began manufacturing musical instruments through third party relationships. On February 1, 2018, RBI purchased furniture and fixtures to outfit its leased office space. The initial cost of furniture and fixtures was $75,000 and is classified as 7-year property for MACRS purposes. For financial reporting purposes, RBI is depreciating the property over 10 years on a straight-line basis with no salvage value. With its initial success and high demand for its products, RBI decided to begin manufacturing its own musical instruments. On November 1, 2018, RBI leased a manufacturing facility and purchased manufacturing equipment for $200,000 (also 7-year MACRS Property depreciated straight-line over 10 years for book purposes).

In January of 2019, RBI decided to sell all of its stock in ABC company to purchase more equipment as demand for its products continued to exceed expectations. Unfortunately, the ABC Stock had declined in value since its contribution by Rutsey and the stock was only worth $60,000. RBI utilized these $60,000 of proceeds from the sale of ABC stock plus another $120,000 of loan proceeds from a bank borrowing to purchase additional manufacturing equipment. Such equipment was also classified as 7-year MACRS property with a 10-year book life and no salvage value. Prior to the sale of the ABC stock, RBI had received dividends from ABC in the amount of $3,000 in 2018 and $1,000 in 2019.

In September of 2020, the other shareholders became disgruntled with Rutsey and decided that they no longer wanted him working in the Company. As a result, Rutsey agreed to resign from employment of RBI and also agreed to have RBI redeem 80 of his 100 shares of common stock. On September 15, 2020, RBI distributed $150,000 to Rutsey in return for 80 shares of his common stock (i.e., $1,875 per share).

Your client RBI and its shareholders have come to you in October of 2023 as they have been approached by a private equity firm (PEF) that wants to make a substantial investment in RBI and take a majority ownership stake in RBI. They have advised the RBI shareholders that they desire to take the Company public within a five-year period and would like the three remaining employee shareholders to remain active in the Company and participate in RBI's future growth.

The plan would be for PEF to acquire a controlling interest in RBI. Currently RBI is valued at $960,000 (i.e., $3,000 per share) The three active RBI shareholders would like to cash out Rutsey's remaining interest as part of the deal, but do not necessarily want to receive any cash in the transaction. PEF is willing to invest $1,000,000 cash in RBI; most of which be utilized to expand RBI's business but some of which will be utilized to buy out Rutsey's interest.PEF has also agreed that Lee, Lifeson and Peart will each be issued 20 options to purchase one share of stock for $3,000. Such options will be exercisable after 3 years or pursuant to a public offering, whichever comes first. The options will expire after 5 years.

Your client has informed you that in addition to needing assistance in structuring and analyzing the above transaction, RBI has not done a very good job of analyzing their tax accounts for financial reporting during the past several years and needs assistance with their deferred tax accounts, current income tax expense as well as deferred tax expense.PEF has demanded that RBI needs to get their financial statements, and specifically their tax accounts, in order for purposes of finalizing the deal, and the client has asked us to provide assistance.

Required:

1. Provide an analysis of RBI's tax accounts (i.e. deferred tax balances and current and deferred income tax expense) for years ended December 31, 2018 thru December 31, 2022 and year to date through September 30, 2023. Assume that RBI is a U.S. taxpayer, only and has a federal and state blended tax rate for all years of 25%. RBI has always been an accrual basis taxpayer and a C corporation since inception. Historically, RBI has deducted the maximum cost recovery available on its fixed assets.In addition to the above information, other information for RBI is provided as follows:

Pretax Book Income (Loss) by Year
2018	(50,000)
2019	50,000
2020	100,000
2021	175,000
2022	200,000
thru 09/30/23	220,000

Book and Tax EOY Inventory
	Book	Tax
2018	35,000	40,000
2019	42,000	50,000
2020	55,000	60,000
2021	84,000	95,000
2022	96,000	105,000
thru 09/30/23	104,000	120,000

Allowance for Doubtful Accounts
2018	7,500
2019	14,500
2020	12,500
2021	17,800
2022	12,500
thru 09/30/23	19,500

Meals and Entertainment Expense
	Meals	Entertainment
2018	4,500	7,000
2019	7,500	12,000
2020	9,500	18,000
2021	11,000	26,000
2022	14,000	32,000
thru 09/30/23	18,000	36,000

Product Warranty Reserves
2018	8,600
2019	12,500
2020	18,000
2021	24,000
2022	30,000
thru 09/30/23	36,000

1. Provide a structuring solution for the proposed transaction that will assist the client in achieving its objectives outlining the current and potential future tax consequences of the transaction. Please make sure that you comment on the tax consequences and attributes to RBI and all of its shareholders (i.e., Rutsey, Lifeson, Peart, and Lee)