• April 9th, 2016

Tax research paper

Paper, Order, or Assignment Requirements

Bobby Slurbintz is the founding owner of Slurbintz Corporation. He owns 50% of Slurbintz stock. His wife Margie owns 25% of the corporation, and their three children, Johnny, Douggie, and Patty, own the remaining 25%. The corporation has earnings and profits of about $900,000. Bobby is a mechanical engineer and performs all engineering services for the corporation. He designs the machines sold it the corporation’s clients. Johnny runs the work crew and oversees the cleaning machine construction process. Douggie works occasionally for the corporation in various capacities but has a full-time job. Margie performs the accounting work for the corporation. Patty does not work for Slurbintz Corporation.

 

Bobby is 80 years old and wants very much to retire from Slurbintz. However, Johnny is very worried that the corporation will not survive without Bobby’s engineering expertise. In addition, Slurbintz Corporation has limited cash and cannot afford to cash out ½ of the value of the company. For these reasons, Johnny wants to pay Bobby 20% of the total value of his stock now and 20% at the end of each year for the next 4 years. The value of Bobby’s stock is about $2,000,000, and Bobby invested about $250,000 in the corporation. Johnny also wants to hire Bobby as a consultant for $1,500 per month until the corporation hires a replacement engineer. Bobby’s marginal tax rate for ordinary income is 28% and so his capital gain rate is 15%.

Required

Your tax senior, Carl, knows that Bobby wants sale treatment if possible on this redemption. Carl wants you to research and document your findings to the following questions:

  1. What are the exact disclosures/statements that we must add to the return(s) of either Slurbintz and/or Bobby relating to the complete termination of Bobby’s interest?
  2. Will issuing debt for 80% of the buyout amount cause any problems in Bobby’s obtaining sale treatment of the redemption?
  3. Will hiring Bobby as a paid consultant cause any problems in Bobby’s obtaining sale treatment of the redemption? Carl is most concerned about this issue; he vaguely recalls an appellate court case from the mid-1980s that addresses this issue.
  4. Compute the incremental tax cost if we must characterize the redemption as a dividend.

 

Carl wants you to review §§ 302 and 318 and any regulations that discuss a complete termination of interest stock redemption. Then, see if you can find court case(s) that address issue #3 above. Use these tax law sources as a basis for a well-written 2-3 page memo for the files. The client will not receive a copy of this document.

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