Carrie is a 60-year-old tai chi instructor living in Santa Fe, New Mexico. For many years, she practiced in Hollywood, and because of an acting background, she developed a clientele including many celebrities.

About five years ago, when her husband died, she moved to Santa Fe to escape life in the fast lane, and many of her celebrity clients still see her on a regular basis. The celebrities rave about Carrie and her techniques and endorse her for free. At the encouragement of her celebrity friends, Carrie has developed a unique set of products that she would like to market, but she readily admits she has no marketing expertise.

David Duncan: Dave is a 50-year-old marketing expert. He started his marketing career in the home office of a major chain of brick-and-mortar stores 25 years ago; over the years, he expanded his role within that company to include management of internet marketing operations. He retired two years ago when that company was acquired, and he moved to Santa Fe with his children. As a result of the acquisition, Dave received a large severance package. He became a client of Carrie a year ago. They have become good friends and look forward to working together. Dave is divorced and has two dependent children, one in college in Boston and the other in high school in Santa Fe.

Naomi Nelson: Naomi is the 30-year-old manager of an auto parts warehouse in Santa Fe. She enjoys her job but has gone as far as she can with that company. Naomi is looking for an opportunity with a startup company and got to know Carrie through mutual friends. Naomi is single and has no children.

Andrew Anderson: Andy is a 65-year-old recently retired airline pilot. Andy has been a lifelong fan of yoga and tai chi and has been going to Carries classes almost since the day Carrie moved to Santa Fe. Andy and his wife have always been prudent managers of their money, and they have a substantial net worth. Andy receives military and airline pension income, plus his wife is a successful veterinarian and continues to practice. Andy and his wife are interested in investing cash to help Carries business expand rapidly, and Andy would like to work at least part time for the business. Andy and his wife have three grown children that are independent.

Carrie is presently operating as a proprietorship grossing $200,000 a year and netting $100,000 a year after expenses. She has designed her line of clothing and other wearable gear, plus DVDs and other products suitable for meditation, practicing tai chi, and similar activities. She has obtained copyright protection for her creative work to the extent allowed by law. Carrie does not have any inventory at the present time but plans to acquire inventory and begin marketing and selling her products shortly after forming the new entity. Carrie does not plan to manufacture her products. She will contract that activity out to manufacturing companies recommended by her celebrity friends experienced in the marketing of their own personal lines. In addition, one of Carries closest friends business managers has agreed to offer his services as a consultant to help Dave adapt his skill set to marketing Carries line of products.

Dave has mapped out a business plan calling for modest sales and no or little profit in the first year, but once things catch on, he projects considerable growth and profit potential as follows: Year Sales Net Income 1 $1 million None 2 $5 million $500,000 3 $15 million $2 million 4 $30 million $5 million 5 $50 million $10 million

Carrie, Dave, Naomi, and Andy all plan to become owners of the business in the following ownership percentages, but they are open to your suggestions: Carrie, 50% Dave, 20% Naomi, 5% Andy, 25%

Carrie will be contributing her designs, good will, and contacts willing to endorse her products for free. Dave and Naomi will be contributing their hard work and expertise. Andy will be contributing $500,000 to cover the cost of inventory and initial marketing and other operating expenses.

TaiGa forms an LLC and files as an S Corp.

Five years laterthe business has been successful and Daves business projections have been substantially met. Based on a net income multiplier of 10:1, Tai-Ga is now worth $100 million. Andy has become seriously ill and wants to sell his stock and withdraw from the business. Two persons have expressed interest in buying Andys stock, but issuing new stock is also a possibility. One person is the companys CFO, Brian Bolton. Brian came on board about six months after Tai-Ga commenced operations and has been instrumental in managing the financial aspects of the companys explosive growth. Brian has expressed interest in acquiring up to 2% ownership in Tai-Ga via compensatory stock options. The other investor is Acme Manufacturing, one of Tai-Gas major suppliers: They wish to acquire up to 10% ownership. They require your input on the best way to approach the restructuring. Over the last five years, Tai-Ga's total net income has amounted to $17.5 million after reasonable salaries were paid out to the owners over the years. Of that $17.5 million, $5 million has been invested in inventory and other operating assets. The remainder ($12.5 million) is in cash. The owners have expressed interest in distributing $2 million of the cash in some fashion, and they want you to consider that in your memo. The remainder of the cash will be retained in the business to fund future growth.

Questions:

A. Analyze a client scenario to determine appropriate factors in estate planning for maximizing the tax benefit of the stakeholder.

B. Formulate a recommendation to the client based on research of IRS and other resources.