1. Capital is not a material income-producing factor in Mr. and Mrs. Vâ€™s professional service
business. Therefore, they cannot form a family partnership to shift earned income to their children.
2. The restaurant business probably required a substantial investment in tangible assets and, therefore,
capital is a material income-producing factor in the business. Mr. and Mrs. B can create a family
partnership by giving each child a 25 percent equity interest in this capital.
3. Ms. Jâ€™s gift of an equity interest in either business to her children will be subject to federal transfer
tax, based on the fair market value of the equity at date of gift. To minimize the transfer tax, Ms. J should
create a family partnership with the second business.
4. S corporations are closely held by individual shareholders who directly manage the corporate
business. The individuals typically want to maintain managerial control through their stock ownership.
Therefore, the stock is subject to a buy-sell agreement that prevents a shareholder from diluting control
by transferring stock to outsiders without permission of the other shareholders. The agreement also
prevents a shareholder from deliberately or inadvertently terminating the S corporation election by
transferring stock to a nonqualified shareholder, such as another corporation or a partnership.
5. Mr. ER should form a partnership with his two grandchildren. The partnership agreement can provide
for a special allocation of 100 percent of the rent income (and cash flow) to Mr. ER and a one-third
allocation of the income (and cash flow) from the antique business to each partner (Mr. ER and each
grandchild). The partners can amend this agreement at any time in the future. This flexibility is not
possible with an S corporation in which shares of stock must have identical rights to all business income
and cash flows.
6. a. As general partners, Mr. Q, Mr. R, and Mr. T are each personally liable for the $500,000 judgment.
b. If QRT Dental Services is a LLP, only Mr. R is personally liable for the $500,000 judgment.
c. If QRT Dental Services is an LLC, only Mr. R is personally liable for the $500,000 judgment.
7. a. As general partners, Mr. Q, Mr. R, and Mr. T are each personally liable for the $30,000 judgment.
b. If QRT Dental Services is a LLP, Mr. Q, Mr. R, and Mr. T are each personally liable for the $30,000
c. If QRT Dental Services is an LLC, no member is personally liable for the $30,000 judgment.
8. Mrs. T apparently does not need the cash flow generated by her business for personal consumption.
By incorporating the business, she can take advantage of the lower corporate tax rates (15 percent and
25 percent) on the first $75,000 of income. She avoids any additional tax by reinvesting after-tax income
in the corporation rather than distributing a dividend. In contrast, Mrs. N apparently spends the cash from
the business and would pay a double tax by operating the business in corporate form.
9. BNC can distribute its $495,000 after-tax income as a dividend to its shareholders or use the $495,000