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Tax Planning Advice and Analysis for Robert JonesJonathan SiegelSouthern New Hampshire University1
AbstractThis paper discusses, in the form of a memorandum, various tax planning and accounting issuesfor a Robert Jones who plans on converting his sole proprietorship into a taxable legal entity.2
MemorandumMarch 8, 2017To:James Marshall, C.P.A., Managing PartnerFrom:Jonathan Siegel, C.P.A., J.D., Senior AssociateRe:Robert JonesThe purpose of this memorandum is to discuss various accounting and tax planningissues in connection with our client, Robert Jones (“Jones”) and his plan to convert his Floridaused car sole proprietorship business into a taxable legal entity (the “Business”). Factual Background. The Business is very successful, and reported $1.2 million in taxable income in 2015.Jones expects the Business to grow at 10% over the next several years. Jones’ personal wealth is valued at $14 million and includes investments in land, stocks,bonds, his home and cash. The $14 million includes land purchased in 1966 for $450,000 with afair market value of $9 million, stocks and bonds with a basis of $1.2 million and a fair marketvalue of $5 million (all with holding periods greater than one year), and a home purchased in1972 for $140,000 and a fair market value of $600,000. The remaining $3.2 million is in cash. The Business is currently valued at $53 million. The $53 million is composed of landand a building with an aggregate fair market value of $41 million. The basis in the land and thebuilding is $2 million and $400,000, respectively. The inventory has a fair market value of $12million, and a cost basis of $5 million. Any office furniture and equipment owned by thebusiness is fully depreciated with no value. In connection with the conversion of the Business, Jones intends to provide his daughter,Mandy, with a 40% ownership interest. Jones intends on initial compensation for his services to3
the Business in the amount of $180,000 per year, and compensation for Mandy in the amount of70,000 per year.Business Entity. There are several issues that need to be addressed to determine the appropriate type oflegal entity for the Business. In Jones case those issues are, (i) tax consequences of theconversion; (ii) legal liability of the entity; (iii) profit sharing by including his daughter Mandy;and (iv) estate planning issues for Jones.Jones has informed this firm that he would like to operate the Business in a type of entitywhere the costs to convert to that entity are minimal and the tax consequences to him are none.He also would like the Business to have limited liability for its actions so he can protect hispersonal wealth from litigation from negligent acts of the Business. He would like his daughterMandy to have a 40% ownership interest in the Business, but does not want to share 40% of theprofits of the Business with Mandy, and he would eventually like Mandy to own 100% of theBusiness at the time of his death. Jones would also like to be able to retain as much profit in the
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Business, A Paper, Taxation in the United States, Robert Jones