hello please see attached document I need help with thanks

You are working as an accountant at a mid-size CPA firm. One of your clients is Bob Jones. Bob's personal information is as follows: DOB: October 10, 1952 SSN: 444-00-4444 Marital Status: Single Home Address: 5100 Lakeshore Drive, Pensacola, FL 32502 Bob has a very successful used car business located at 210 Ocean View Drive in Pensacola, Florida. Last year, you filed a Schedule C for Bob that had $1,200,000 in taxable income. The business will have an income growth rate of 10% per year over the next several years. Bob's personal wealth, including investments in land, stocks, and bonds, is about $14,000,000. Last year, he reported interest income of $20,000 and dividend income of $6,000. The $14,000,000 includes land worth $9,000,000 that Bob bought in 1966 for $450,000. The stocks and bonds have a tax basis of $1,200,000 and they are currently worth $5,000,000. All of the investments have been owned for more than a year. In addition to his investments, Bob paid $140,000 for his home in 1972 and it is now worth $600,000. The used car business is currently valued at $53,000,000 including the land and building, which are worth $41,000,000. Bob's tax basis in the land and building is $2,000,000 and $400,000, respectively. The inventory is worth $12,000,000, with a cost basis of $5,000,000; the remaining assets, which include office furniture and equipment, make up the remainder of the business's total value. The office furniture and equipment are fully depreciated. Bob wants your professional advice regarding whether he should continue to operate as a sole proprietor or convert the business to a partnership, an S corporation, or a C corporation. Based on one of the business entities selected, Bob wants to include Mandyhis daughterin the business as an owner and manager with a possibility of 40% interest. One of his concerns is what would happen to his business after he passes away. Mandy's personal tax information is as follows: Mandy Jones DOB: June 30, 1990 SSN: 999-99-9999 Marital Status: Single Home Address: 5990 Langley Road, Pensacola, FL 35203 The type of business bob is operating is a partnership A. Explain the tax effect based on providing $180,000 per year for the client's salary and $70,000 per year for his daughter's salary if they withdraw cash from the business or pay dividends as appropriate. My Respond According to the Internal Revenue Code (IRC) 1.162-7, personal services rendered in the business may be included among the ordinary and necessary expenses paid or incurred in carrying out the business, a reasonable allowance for salaries or other services rendered by the owner or a partner. Under this code, what qualifies compensations as such is whether they are reasonable payments and are actually paid entirely for the services rendered. Paragraph (a) of 1.162-7 clearly states that for a corporation or a partnership in this case, if the salaries are in excess of those ordinary paid for similar services and excessive payments have a close relationship to the stockholdings of the owners, it would seem likely that the salaries are not paid wholly for the services rendered, but the excessive payments are actually a distribution of earnings. As such, such payments would not qualify for a deduction. The IRS holds that partners are not employees instead, they are self-employed when performing services for the partnership and should therefore not be issued with Form W-2. The IRS also clarifies that any distributions to the shareholders form the earnings or profits is generally a dividend, but if the distribution is return of capital to the shareholder, that is not taxable. Based on the facts in this and the above description, it's therefore appropriate to take the salary since they would be allowed to deduct it as deductible expenses. However, they must ensure that the requirements set up by IRC 1.162-7 are met. Considering the fact that the daughter is receiving $70,000 while the dad receives $180,000, this would qualify since under IRS regulations, she cannot take more than half of the father as prescribed under IRS publication 541. She has to offer services in return in order to qualify for this. The major reason why it won't be appropriate to take dividends instead, they would as qualify as gift capital interest. Even though that interest won't be taxable on the daughter's side, the father would include it under his income for taxation under tax rules. According to 704, in the case of any partnership interest created by gift, the distributive share of the done under the partnership rules shall be included in his gross income, except to the extent that such share is determined without allowance for reasonable compensation for services rendered by the donor. Professor feedback- It looks like you are recommending organizing as a partnership (you cited a lot of partnership sections) but you also mention 'stockholdings' and 'dividends'. Unfortunately, that really muddied things up for me. If it was partnership, I would have expected discussion of the partners being personally responsible for the FICA and Medicare tax on each partner's share of partnership income. In addition, I could not find discussion of Guaranteed Payments which is a very important tool in managing/allocating the tax burden for partnerships. Here's a link to an article that discusses treating partners as employees http://www.journalofaccountancy.com/issues/2014/aug/20149676.html B. Justify the percentage of ownership the client's daughter should have in the business based on the type of business entity recommended. Consider the tax law in reference to the recommendation and how the decision will affect the daughter's tax return. My Respond According to 722, the basis of an interest in partnership acquired by a contribution of property, including money, to the partnership shall be the amount of such money and the adjusted basis of such property to the contributing partner at the time of the contribution partner at the time of the contribution increased by the amount (if any) of gain recognized in 721(b) to the contributing partner at such time. However, the daughter doesn't contribute capital as prescribed under this section but her share is termed as gift capital received from the father and is therefore justifiable under the terms stated in section 704. According to 704, in the case of gift of capital interest to a family member, the basis for such interest attributed to the donated capital must not be proportionately greater than the donor's distributive share attributed to the donor's capital. Based on this fact, the daughter can have the share of 40% is very appropriate. Looking at the illustration given, whereby the father is receiving $180,000 while the daughter is receiving $70,000 which is 40% of the total income received in the business, her share is not greater than the father's share. Under tax rules, the daughter would have to report her share of income as her gross income which is liable for taxation and this is the percentage of income that had been reported in the business' taxable income. Professor feedback-Another good try! You used the 40% suggested in the assignment Prompt. That's what Bob thinks that he wants but I'm wondering whether it might make sense to consider other percentages or maybe a stair-stepping approach to get to 40%. Also, I have to wonder where Mandy will get the cash to pay for 40% of the business or whether Bob will cover the gift tax. We're talking some pretty significant money here ($53 million business value * 40% is more than $20 million value and the gift tax would be substantial if that road was taken). A very popular way is via compensation but Mandy will need to really grow as a professional to justify that amount. You may want to build discussion of getting Mandy to a significant ownership position and how to pay for it in your final submission. Googling something like transferring closely held stock to the next generation might help. Just a couple of thoughts. C. Recommend estate planning strategies consistent with tax codes and regulations for the purpose of reducing the taxable estate. Be sure to include gifting property to heirs in your response. My Respond There are a number of estate planning strategies that Bob can implement that will ensure reduction of estate tax but still allow him to remain consistent with the tax laws and regulations. These strategies include deferring compensation income, maximizing the use of tax deductions, and contributing to a retirement plan. Deferring compensation income reduces adjusted gross income. This will prevent the estate from attaining income thresholds thereby resulting in increased taxation (Wahab & Holland, 2012). Maximizing tax deduction strategies such as engaging in charitable contributions can also result in reduced taxation since such engagements are exempted from tax. Another strategy that needs to be used is asset allocation. Bob needs to allocate assets by tax status. Bob should place a bigger prevent of his stock holdings outside his retirement account while a bigger proportion of his fixed-income holdings should be placed inside retirement accounts (Armstrong, Blouin & Larcker, 2012). This will allow him to benefit from a reduced tax rate on long-term capital gains and qualified dividends. Professor Feedback-Good start although inclusion of some sample calculations would have helped plus mention of tax savings strategies like valuation and estate tax freeze would have helped as well. Also, I have to wonder where the money to pay the estate tax will come from. D. Illustrate the best course of action if the client decides to leave the business in three years. Provide some advice to him should he decide to gift the business to his daughter or transfer the assets or common stock to her, depending on the business entity you have selected. My Respond If Bob wants to gift the business, the best course of action is to allow his partner to acquire the remaining part of the business. Allowing his partner, who is his daughter, to acquire the part owned by Bob will ensure continuity of the business. This will allow him to avoid going through the dissolution process which might require legal processes. It will also allow him situations where he is compelled to sell the business, which would attract taxation due to capital gained from the sale. Professor Feedback-Good start with this one but I really need to see some solid suggestions. E. Illustrate the best course of action if the client wishes to sell the business. Consider the tax consequences with regard to capital gains and losses, ordinary income issues, and selling an existing operating business. My Respond If Bob wants to gift the business, the best course of action is to allow his partner to acquire the remaining part of the business. Allowing his partner, who is his daughter, to acquire the part owned by Bob will ensure continuity of the business. This will allow him to avoid going through the dissolution process which might require legal processes. It will also allow him situations where he is compelled to sell the business, which would attract taxation due to capital gained from the sale. Professor Feedback-I see your discussion about Bob selling the business but I didn't see discussion of the estate impact (and how that impact s/b managed) of the cash proceeds from the sale. If Bob sells the business, even after paying capital gains taxes, there is going to be a lot of cash in his estate F. Summarize the alternative involving the possibility of liquidating the business, using rationale based on tax research, codes, and regulations. My Respond Partners liquidate companies for the various reasons that include division of business assets, and sale of enterprise operated within the firm or desire to change operation to other forms of business such as a partnership or sole proprietorship. The aim of changing business structure is avoiding double taxation and personal holding company (PHC) status. Therefore, it is wise to consider an alternative before liquidation, and one option is the sale of corporate stock by the shareholder in a redemption transaction or sale to another shareholder instead of selling the assets. This option variation is the sale of inventory to an employee stock ownership plan (ESOP). When the partnership is being liquidated, it is necessary to keep good records pertaining partnership liabilities payment, loss on realization or allocation of gain, cash distribution to the partners based on their capital balance, and noncash assets sales. Double taxation avoidance alternative is strategy mostly used when liquidating the partnership to ensure that all tax arrears are either set off or knocked off. Professor Feedback- Good discussion of partnership liquidation but the question was more skewed toward Bob liquidating the present business (the proprietorship) without first transferring it to some other business form so I would have gone into a bit more detail of that approach in my presentation. G. Summarize the alternative of transferring the business activity, providing justification based on tax research, codes, and regulations. My Respond Transferring business activities refers to the method and time of transferring of assets such as land and machinery from an old party to a youthful party that should fit in the overall enterprise transfer plan. However, the transfer of land and building or real property is influenced by considering of estate planning. Therefore, the ownership of assets is transferable from the parent to the heir according to the state law or will and any transfer technique has tax consequences that one should consult his tax advisor. There are various methods of machinery ownership transfer to a young person that Bob can use to transfer to his daughter Mandy. The machinery value can be determined through appraisal of either an auctioneer or a dealer. There are two considerations of machinery sales to the cash flow needs of the youthful party that the asset is being transferred to and the consequences of the income tax of senior party (Yescombe, 67). In the event of outright sale that involves full payment of cash made at the time of sale, tax incurred from capital gains and depreciation recapture are due in that year of sale. However, when the deal is done on the installment sale, the payments are blown out over the years. Therefore, the capital gain and depreciation recapture on the property of the related property should be included in the annual taxable income of sale. Professor looking for a respond like this As discussed previously in prior milestones, the transfer of the schedule C business assets in accordance with IRC Section 351 would allow the client to transfer the business asset base to the C corporation without incurring the income tax costs of a liquidation. The downside is that, as per IRC Section 351 the new entity receives carryover basis in the asset base and the client in return would receive IRC Section 351 qualified preferred stock as well as common stock, as would his daughter. The advantage of the IRC Section 351 transfer is that there would be minimal, if any, gain recognition presently and consequently minimal if any tax implications presently. Further, by transferring the business assets in this type of fashion, the client effectively converts all of the ordinary gains and income discussed in the liquidation summary into capital gain which is capped at a much lower income tax rate per IRC Section 1 because the client is no longer in possession of tangible property but rather capital assets in the form of the stock received in the transaction in return for the assets contributed to the C corporation