76. Tony and Susan are starting a retail business selling formal wear for men and women.
They estimate profits and losses for the next five years to be: ($20,000), ($10,000),
($5,000), $10,000, and $50,000 respectively. Susan will work full time in the store
while Tony will be involved in managing the operations. Susan is married to Tom and
is in the 28% marginal tax bracket. Tony is single and has other sources of income that
put him in the 28% marginal tax bracket. Susan will be paid a salary of $30,000 for
the first five years, after which her compensation will be reviewed. Tony and Susan
each contribute $50,000 to get the business started. The remaining question facing
Tony and Susan is which business form to use for the business. They believe they
should operate as a partnership but have been informed that forming a corporation
might be a better option since it would limit their liability. Prepare an analysis to
determine whether Tony and Susan should operate their business as a partnership or a
74. Bert founded Sambert Corporation a little over a year ago. He believes that his
company, which sells specialized computer toys, will be very profitable over the
next several years, as evidenced by its $400,000 of earnings in the current year.
Although Bert does not need the income, he is interested in getting the earnings
out of the company while paying the least amount of tax possible. Bert intends to
work actively in the company and be paid a reasonable salary for the next 5 years.
At the end of that time, he expects his oldest son to take over the company after
finishing college. Bert knows that the salary he draws will reduce the corporation’s
taxable income and that he will be taxed at ordinary rates on that income. However,
he is interested in the tax implications of property distributions the company
might make to him either in redemption of his shares or, if something prevents his
son from taking over the business, in the liquidation of the corporation. Discuss
the types of distributions that a shareholder might encounter over the life cycle of
the corporation and the tax implications of each type of distribution.
108. Fred, age 50, plans to retire when he reaches age 65. He is considering investing
in either an IRA or a Roth IRA. He plans to contribute $6,000 per year until he
retires. Fred expects his marginal tax rate to be 25% until he retires, when he
expects his marginal tax rate to drop to 15%. He anticipates that the rate of return
on either IRA will be 8% before considering any tax effects. Prepare a memo analyzing
the tax effects of investing in a regular IRA versus a Roth IRA. Discuss factors
that might influence Fred’s decision to choose either an IRA or a Roth IRA.
Assume that Fred meets the income limits for making the maximum annual