Flat Creek Inn Case

Facts and Circumstances

The Flat Creek Inn is a 2-star motel in Jackson, Wyoming, owned by Patsy (52%) and her six children, (8% each for the last several years). All owners are considered passive investors, and do not manage the company day to day. The hotel has taxable income of approximately $1,000,000 per year. The hotel has a small full-time staff and a larger seasonal staff. Flat Creek Inn pays $400,000 in W-2 wages each year. The following facts apply:

1. Patsy is 75 years old.

2. Patsy is married, and she and her husband have ordinary taxable income of $200,000 per year after taking all allowable deductions, but before considering the income from Flat Creek Inn or any deductions associated with income from Flat Creek Inn.

3. The six children are all married. Three of the children have ordinary taxable income of $415,000 per year from sources other than Flat Creek Inn, two of the children have ordinary taxable income of $150,000 per year from sources other than Flat Creek Inn, and one child has ordinary taxable income of $65,000 per year from sources other than Flat Creek Inn. The income numbers represent their taxable income after taking all allowable deductions, but before considering the income from Flat Creek Inn or any deductions associated with the income from Flat Creek Inn.

4. Patsy plans to bequeath her ownership in Flat Creek Inn to her children, equally divided, at death.

5. Patsy and her six children have no plans to sell Flat Creek Inn because it provides unique summer employment opportunities for Patsy's grandchildren.

6. The following tax rates apply:

2021

Corporations 21% on all levels of taxable income

2021 Preferential LTCG tax rates:

0% Rate:

MFJ: Taxable Income $0 $80,800

15% Rate:

MFJ: Taxable Income $80,801 $501,600

20% Rate:

MFJ: Taxable Income > $501,600

Unearned Income Medicare Contribution Tax 3.8% of the lesser of net investment income or the excess of AGI over $250,000 if married filing jointly.

Case Questions

Please use supporting analyses when applicable to answer the following questions:

1. Assume that Patsy needs $100,000 after-tax cash from Flat Creek Inn to be able to

support her lifestyle. Do you recommend Flat Creek Inn be organized as an LLC or a C-Corp? Support your recommendation with calculations.

2. See question 1. Of the remaining six owners, who will likely view your recommendation favorably and unfavorably? Why?

3. How does Patsys life expectancy affect your recommendation, if at all?

4. Assume instead that Patsy does not need any cash flow from Flat Creek Inn because income from

outside sources is sufficient to support her lifestyle. Do you recommend Flat Creek Inn be organized as an LLC or a C-Corp? Support your recommendation with calculations.

5. See question 4. Of the remaining six owners, who will likely view your recommendation favorably and unfavorably? Why?

6. What additional nontax factors should you consider when recommending how to organize Flat

Creek Inn?