1. Problem 3-A: Lucy Catering Driving factors for Lucy: Earnings bailout - no double income taxes and no or low self-employment taxes Separate tax entity - single owner LLC would be disregarded entity Passive income potential for Lucy, possibly sheltered by passive losses from other ventures Limited liability - trucks on road and 10 employees No need for owner/employee fringe benefits Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 3-18 Recommendation: S Corp

2. Problem 3-B: Management Consulting Firm Driving factors for Sam, Larry, and Joe: Fringe benefits for themselves Earnings all bailed as compensation income Limited liability from negligence of other owners and employees Business service income vehicle - not likely sale candidate Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 3-19 Recommendation: C Corp

3. Problem 3-C: Roger Specialized Shop Driving factors for Roger: Maximum control (Board control) - no hassles from minority owners Income bailout to minority owners - no double income taxes or self-employment taxes Protected compensation contract and bonus program Limited liability - machines, employees and contracts Passive income to minority owners Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 3-20 Recommendation: S Corp

4. Problem 3-D: Roger Revised Plan Driving factors for Roger: Losses passed through to investors Beat basis and at-risk hurdles for investors Maximum control - no hassles from minority owners Income bailout to minority owners when turn profitable - no double income taxes or self-employment taxes, preferably passive income Protected compensation contract and bonus program Limited liability - machines, employees and contracts Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 3-21 Recommendation: LLC or Limited Partnership with Roger- owned S Corp general partner

5. Problem 3-E: Rhonda Flash Application Driving factor for Ronda: Ability to attract venture capital Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 3-22 Recommendation: C Corp

6. The 1561 Trap The 1561 Trap - No multiple C Corp benefits to group Only one Section 11 bracket racket Only one 250k accumulated earnings tax credit Only one 40k corporate AMTI exemption Only one $2 million Section 59 tax exemption Big Issue: What is controlled group? Three types Parent-Subsidiary controlled group Brother-Sister controlled group Combined controlled group Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 3-23

7. Parent- Sub Controlled Group Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 3-24 Parent C Corp Sub 1 C Corp Sub 2 C Corp Sub 3 C Corp Sub 4 C Corp 80% + - 80% of voting or total share value of each corp owned by other corps in group, and - 80% of voting or total share value of at least one corp owned by a common parent corp.

8. Brother- Sister Controlled Group Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 3-25 5 or Fewer Persons 50% + - 5 or fewer individuals, estates, or trusts - Own 50% of voting or total share value of both - Consider only minimum common ownership in each entity Brother C Corp Sister C Corp 50% +

9. Combined Controlled Group Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 3-26 5 or Fewer Persons 50% + - 3 or more corps part of parent-sub or brother-sister controlled group, and - At least one corp both a common parent of parent- sub group and a member of brother-sister group Brother C Corp Sister C Corp 50% + Sub 1 C Corp Sub 2 C Corp 80% +

10. Controlled Group Attribution (1563) Options - Deemed exercised 5% partners - proportional interests 5% trust and estate beneficiaries 5% corporate shareholder - proportional interests Spouse Minor children (under age 21), but not adult children unless If person owns more than 50%, considered owner of stock owned by parents, grandparents, grandchildren and children over age 21 Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 3-27

11. Problem 3-F: Three C Corp Plan Stock Ownership Minimum Common Ownership X Corp Y Corp Z Corp X-Y X-Z Y-Z Jim 10% 40% 30% 10% 10% 30% Linda 80% 5% 25% 5% 25% 5% Sam 10% 55% 45% 10% 10% 45% Totals 100% 100% 100% 25% 45% 80% X and Y Not Brother-Sister X and Z Not Brother-Sister Y and Z Brother-Sister Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 3-28

12. Problem 3-G: Medical Supply JV Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 3-29 Key factors for ABC Inc. and Smith Enterprises: Move funds with no tax impact (pass thru entity) Flexibility with income and cash distributions Contract control provisions that protect both Limited liability - separate employees S Corp not option - ineligible shareholders Recommendation: LLC

13. Problem 3-H: Jones 482 Trap Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 3-30 Jones C Corp Newco C Corp Individual Shareholders Bargain Sale Imputed Income Imputed Dividend Imputed Contribution Income imputed at both corporate and shareholder levels

14. Problem 3-H: Jones Industries Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 3-31 Key factors for Jones Industries: Avoid 482 trap risks Separate offshore buying entity Common control No tax hassles on dealings between entities Pricing flexibility between entities Recommendation: Consolidated Group with C Corp Holding Company Parent

15. Problem 3-I: Jerry Yacht Company Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 3-32 Key factors for Jerry: Preferred cash flow to investors Special and different profit and loss allocations (30%-70% profits and 99%-1% losses) Jerry in complete control No double tax or self-employment tax hassles Pass thru of profits and losses Limited liability - yacht building and sales Recommendation: LP with S Corp General or LLC

16. Problem 3-J: Golfer Grow and Sell Company Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 3-33 Key factors for five Golfer owners: Basis build-up on income accumulations No double tax on sell-out Tax-free corporate reorg potential No ordinary income on entity ownership sale Limited liability exposure Equal control Recommendation: S Corp

17. Problem 3-K: Wharton Subs Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 3-34 Key factors for Wharton Enterprises Multiple separate entities Wharton parent owner of all entities Consolidated operations for tax purposes Preserve pass thru benefits Minimize or eliminate conversion hassles Recommendation: Maintain existing S Corp with new corporations being Qualified Subchapter S Subs under 1361(a)(3)