P Corporation operates six automotive service franchises in a metropolitan area. The service franchises have been a huge success in their first three years of operation, and Ps annual taxable income exceeds $600,000. J Corporation owns the real estate associated with the six service franchises. P leases its automotive service franchise locations from J. J reports large interest and MACRS depreciation deductions because of a highly leveraged, capital intensive operation. As a result, J has reported NOLs in its first three years of operation. P and J file separate tax returns.

Carol owns 100% of both corporations. Carol sees the idea for the automotive service franchise chain starting to really develop and expects to add six more locations in each of the next two years. Because of the rapid expansion that is planned, she feels that she has outgrown her fathers accountant and needs to have new ideas to help her save tax dollars so she can reinvest more money in the business.

Required: The tax partner that you are assigned to requests that you prepare a memorandum outlining your thoughts about Carols tax problems and suggested solutions to those problems in preparation for his meeting next week with Carol.