TWO SISTERS ENTERPRISES, INC. TEACHING CASE INTRODUCTION Forrow Jones and Nena Taylor are twin sisters living in Houston, Texas. Both sisters have always had an entrepreneurial spirt. Having recently come into significant resources following the death of a dear relative, Forrow and Nena decided to pool their resources and form a business together. Although being very loving sisters, they have had many contentious moments over the years. In April 2018, Forrow and Nena formed a corporation named Two Sisters Enterprises, Inc. to operate a Flower Pot Store doing business under the assumed name of F&N Flower Pots Emporium. Forrow and Nena established the business with cash contributions ($300,000 each) making them equal owners of the corporation acquiring 1,000 shares of common stock each. F&N Flower Pots Emporium manufactures unique multi-colored flower pots. F&N Flower Pots Emporium has been profitable over its initial years of operation and Forrow and Nena have both been actively involved in managing the business. They have developed exceptionally good personal relationships with several customers (both wholesale and retail) that they believe keep the customers returning for more purchases as well as referring their experiences to others. Wanting to quickly begin the business, Forrow and Nena formed the corporation to operate the business (without any advice from tax professionals). Forrow Jones assumed the role of president of the corporation and Nena Taylor became Vice-President of Finance. These titles were primary for corporate necessities and formalities and both were deeply involved in the day-to-day operations of the business. This was of particular interest to both of them to be very actively involved in the activities of the company at a personal level. The corporation was organized with the express purpose of being a closely-held business with no outside owners. A buy-sell agreement was prepared and executed immediately upon formation of the corporation stating that the only owners of the corporation were to be the two initial owners and their children. If for any reason an owner wanted to discontinue their ownership in the business, their stock in the corporation may transferred only to the corporation, the other shareholders or their children. As such, no outside ownership could occur. EARLY STAGES OF BUSINESS The initial stages of the business were very promising. The sizeable initial capital investments allowed for the business to get off to a great start as there was sufficient capital to locate a very desirable location for the business, hire sufficient and experienced personnel, acquire significant initial inventory and equipment and other items for the successful operation of the business. The profits of the business in its first three years of operations enabled for the rapid development and growth of the business and no distribution of the earnings of the business to the owners occurred during this period. Nena desired to get her two adult children deeply involved in the business. In early 2021, Nena gifted 250 shares each of her initial 1,000 shares of common stock in Two Sisters Enterprises, Inc. to her son, Daniel Taylor, and her daughter, Eileen Taylor. Daniel and Eileen both had been regularly active in the business since its inception and welcomed the opportunity to be owners as well. The business has done very well and continues to thrive. The owners enjoyed running the business and the business has developed a solid positive reputation in the community. Despite this, there have been times where the contentious relationship between Forrow and Nena has surfaced. Initially there were minor disagreements on inventory purchases and facility layout and the like. However, now the disagreements have become more serious and contentious dealing with important financial management issues of the company. DETERIORATION OF RELATIONSHIP OF PRINCIPAL OWNERS Throughout the year of 2022, the declining relationship between Forrow Jones and Nena Taylor has reached the point where the effectiveness of the operation of F&N Flower Pots Emporium has suffered. The maintenance of sufficient and the appropriateness of inventory, employee morale, hours of operations and beyond were significantly impaired by the inability of the principal owners to effectively manage the business in a professional manner. It has become apparent that the business cannot continue its successful rise in the present management environment. As such, Forrow Jones and Nena Taylor have decided that for the sake of the business the two of them should no longer co-exist as owners of Two Sisters Enterprises, Inc. Forrow and Nena are now seeking professional tax advice on how to address their dilemma. They are interested in learning how they can best salvage the business with either one of them or neither of them still involved in the business. In addition to seeking advice on different approaches that can address the present dilemma, the minimization of the income tax consequences to both the business and each of them (as well as Daniel and Eileen) in their individual capacities are of paramount interest to them. In anticipation of the major decision that the owners must soon make, Two Sisters Enterprises, Inc. had all its assets appraised.

The Balance Sheet at the date of the very recent appraisal with the corresponding appraisals of the market value of all its assets is as follows:

Assets Adjusted Tax Basis Fair Market Value Cash $350,000 $350,000 Accounts Receivable 70,000 60,000 Inventory (LIFO Basis) * 180,000 360,000 Equipment 190,000 150,000 Investments (Marketable Securities) 250,000 370,000 Land (Used in The Business) 90,000 80,000 Building 270,000 190,000 Total Assets $1,400,000 $1,560,000 ** Liabilities And Stockholders' Equity Accounts Payable $ 70,000 Note Payable 100,000 Mortgage on Building 130,000 Total Liabilities 300,000 Total Stockholders' Equity 1,100,000 Total Liabilities and Stockholder's Equity $1,400,000 * - The FIFO Method Basis of the Inventory would be $240,000. ** - The appraisal of the entire business was $1,900,000. ASSIGNMENT QUESTIONS Specific Assignment Questions are as follow:

(1) Write a memorandum to Forrow Jones and Nena Taylor explaining the federal income tax consequences to each of them and the corporation if the corporation is dissolved.

(2) Write a memorandum to Forrow Jones and Nena Taylor describing other forms of businesses that can be pursued that will allow them to separate their ownerships. Briefly emphasize the potential federal income tax impact to each of them (and the business entities where appropriate) of the other forms of business.

(3) Write a memorandum contrasting the federal income (and other) taxation consequences of C (Regular) Corporations, S Corporations, Partnerships and Limited Liability Companies (LLC's).