2007 Deloitte Regional Case Study

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2007 Deloitte Regional Case Study

Publié le : lundi 11 juillet 2011
Lecture(s) : 142
Nombre de pages : 40
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2008 Deloitte Tax Case Study Competition Regional Case Study By the time they were seniors at Carolina College (CC), Tyler Jordan, Lauren Nichols, and Chrissy Morgan were accepted as Southern Royalty. For the rest of his life, Tyler could go almost anywhere in the state and people would whisper excitedly, Hes the one who won the SEC championship game that year! And Lauren and Chrissy were forever hearing excited shrieks of, Its the Saucy girls! Younger years.Tylers father, Mike, was a pro football Hall of Fame star. His mother, Charlotte, was the heiress to and current president of McMillan Imports, Inc., a 200-year-old shipping company. Tyler grew up in historic Charleston in what, well, most of us would call a mansion. He was the youngest of three sons and some people have said he was a bit spoiled. Charlotte Jordan was distressed that her baby wanted to go to a state university. But Tyler won that fight - he had the chance to quarterback for Coach Duke Sparrier, and he was not about to give up that opportunity! Lauren and Chrissy, who are cousins, were raised in an almost middle-class home in Greenville, South Carolina, a beautiful little town that had once been known as The Textile Capital of the World. Both girls parents were divorced. When Laurens mom moved out of state, Lauren received permission to live with Chrissys mom (Aunt Kate to Lauren) in order to finish high school in her hometown. The girls spent their summers working in the clothing mills, but the jobs were harder and harder to come by as the mills tightened their belts  and sometimes closed their doors  due to global competition. Theirs was a hard, but happy, life. Lauren was the top of the pyramid in the high school cheerleading squad, and Chrissy was head majorette in the dance line. Chrissy had danced and acted in plays since she was six years old, and she was quite an accomplished weekend dance instructor at a local studio. They both happened to be beauties; Lauren was Homecoming Queen, and Chrissy was Prom Queen during their senior year in high school. They also were creative in overcoming their financial limitations, making many of their own clothes and setting the standard for fashion at their school in the process. Their ticket out of town came in the form of scholarships: Lauren received an athletic scholarship from CC for cheerleading; and Chrissy received an academic achievement grant from Hadley Mills, Inc. Hadley Mills is Kate Morgans employer and was Laurens and Chrissys summer employer during their high school years. Freshman year of college.Two weeks before freshman year classes started, Chrissy and Lauren rolled onto the Carolina College campus in Chrissys dented and slightly rusty Honda Civic. That transmission is going to give up any day now, Chrissy laughed. They parked the car behind the dorm and vowed no one would ever know it was theirs. After unpacking, they headed off to dance and cheerleading practice. With a goal of pledging a sorority, they had saved all of their money from summer jobs and had obtained glowing recommendation letters from friends of friends. After sorority rush, they both were welcomed with open arms by their new sisters of Chi Alpha Tau (thats theΧΑΤs, or CATs, in case you werent paying attention).
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2 Across campus, Tyler was moving into an apartment near the Athletic Dorm. He planned to redshirt (sit out of football) during his freshman year, but he was on campus early to practice with the team. Tyler also rushed, and, as a double-legacy, had no choice but to pledge the Delta Omega Gamma fraternity (they are theΔΩΓs  or DOGs). Sophomore year.At the beginning of their sophomore year, Tyler met Lauren and Chrissy in a business communications class. Lauren had decided to work toward a double major in human physiology and business administration. Aunt Kate had advised her to learn something about business so she could run her own life. Lauren envisioned getting a graduate degree in physical therapy and opening a chain of sports rehabilitation facilities. Chrissy was majoring in business and taking as many fine arts electives as possible. Im going to be a famous actress, she declared, but at least Ill have the business degree to fall back on. Youll be a great actress, Lauren teased. You can be quite dramatic. Tyler was taking business courses because his parents insisted on it  after all, he was an heir to (and on the Board of Directors of) McMillan Imports, Inc. But, at this point, he was only interested in The Pros. Im as good as my Dad and stronger, thought the 62, 200-pound quarterback. But, truth be told, Tyler actually feared he wasnt big enough or fast enough to make it. The business communications professor placed the trio on the same research team for the semester. Initially, Tyler wasnt very impressed with Chrissy or Lauren and vice versa. [For the first few weeks, in fact, they fought like ΧΑΤs and ΔΩΓs. (Ha, ha!)]. Tyler rolled his eyes at the accents and mannerisms of the country girls, and Chrissy commented to Lauren, Well, doesnt he thinkhe’sspecial! Offering football practice as an excuse, Tyler left much of the work for the two young women, and they in turn worked like champions to write the papers and prepare the presentations. One week before final exams, CC played in the SEC Championship game in Atlanta. Near the end of the third quarter, CC was behind 20-17, and the first-string CC quarterback was roughed-up a bit. Tyler was called in to play the rest of the game. With three minutes left in the fourth quarter, Tyler spotted an open receiver on the 3-yard line. He completed the 18-yard pass, and the receiver ran in for the touchdown! But just as the ball left Tylers hand, a 280-pound linesman broke through and tried to sack him. Tylers leg contorted, and, even above the ecstatic crowds roars, he heard the dreadful and unmistakable snap of his ACL (anterior cruciate ligament) separating from his leg bone. Tyler saved the game, but the MRI test showed extensive damage to his left knee. You have a blown ACL and a severely torn meniscus. Well schedule surgery right after final exams, the doctor said.
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Tyler was in severe pain during final exams, and he was unhappy because he couldnt play in the Sugar Bowl. Chrissy and Lauren were kind young women and offered to work overtime to complete the final project in the business communications course. Humbled by their concern and efforts, Tyler stepped-up and worked diligently on the project, despite his discomfort. The trio earned an A in the course and became friends in the process. At one late-night study meeting, Lauren told Tyler some of the things she had learned about knee rehabilitation in her human physiology studies. Im taking a sports injury treatment course in the spring, she said. You might want to take it, too. Youll be going through rehab the same time youre taking the class. There has to be some warped kind of advantage to that. Lauren laughed mischievously, but kindly, and Tyler grinned, looking at her with new appreciation. The next ten years for Lauren and Tyler.While rehabilitating his knee, Tyler was forced to accept that while he would never be able to play at the pro football level, he could continue to be an impressive college player. He came to respect the value of physical therapy. He followed the painful PT recovery regimen without wavering, and during his junior and senior years, he became a football legend in South Carolina. He decided during that time that he wanted to give the same hope and opportunity to others, so he changed majors, and he and Lauren both graduated with dual degrees in human physiology and business administration. They went on to complete the Doctor of Physical Therapy degree, which required almost four years of additional training. As part of that program, they could choose one or more advanced concentrations. Tyler focused on Cardiology and Geriatrics, and Lauren specialized in the broad category of Womens Health. They married after they completed their clinical work and went to work for a sports rehabilitation clinic in Charleston. Charlotte Jordan had expected her son to be either a professional football player or a vice-president of McMillan and was astounded with his career decisions. With near-disgust, she said, I am shocked that you would accept such a low-level position in such an inconsequential field. In response, Tyler patiently explained, Mom, Im going to help people regain lost lives. This position is just until we have the experience to run our own business. Charlotte was somewhat appeased by this explanation, and it helped that she soon had grandson Jake and granddaughter Samantha to occupy her mind. When Tyler was 30, he received a $2 million (cash) principal distribution from a trust established for Tyler by his grandfathers estate. Now we can start our first clinic! he declared. So Tyler and Lauren used part of the trust distribution to form the Athletic Recovery Center (ARC). They combined some of the remaining funds with funds from Mike and Charlotte. With this money, the four investors formed ARC Properties (Properties) to buy and hold the real estate and equipment that would be used by ARC. The remaining trust distribution was used to make a down payment on a home. When Baby Chrissy arrived a year later, Lauren smiled and said, Our home is now perfect.
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4 The next 10 years for Chrissy.During college, Chrissy starred in a variety of campus music and dance productions. She earned acting roles in a number of local commercials and worked part time as the weather girl and weekend anchor on a local morning show. Chrissy was determined to head for the Big Screen, so as soon as she graduated (and paid off a mountain of parking tickets!), she and her cousin Lauren took a six-week road trip to Los Angeles. She found an apartment, traded-in the Civic (now 16-years-old) for a brand new hybrid, and started knocking on doors to find work. She planned to work as a real estate sales agent until her big break came through. Chrissys PDA was loaded with the contact information for everyΧΑΤsister who ever worked in the movies or television. Success didnt take long  in only a matter of months, she landed a minor part in an afternoon soap opera, followed quickly by a role as the quirky sidekick in what turned out to be a summer blockbuster movie. One opportunity followed another. By the time she was 30 Chrissy was an A-list actress with starring roles in six award-nominated films to her credit. Sadly, she had also been through two short-term marriages (and divorces), but she nevertheless always seemed to enjoy her life. Chrissy and Lauren talked at least once a week to laugh about their respective adventures with casting directors, PT patients, and diapers. Age 37.Everything rolled along nicely for several years, but when our trio reached age 37, everything seemed to change overnight as the economy took a nose dive. Health insurance companies cut back on the types of physical therapy they would cover and the amount they would pay. Eventually, ARC closed its doors and the company was liquidated. The family (Mike, Charlotte, Tyler, and Lauren) decided to keep Properties in existence until they could decide what to do with the building and equipment. Tyler finally satisfied Charlotte by going to work at McMillan, but he was 37 years old, and starting over at a modest salary. (Actually, most of us would consider it a nice income, but it was low for someone paying for a trendy, 5,000-square-foot house and the related life style). To help make ends meet, Lauren started sewing again. She found a fabric made from bamboo fibers that was imported from China. It was inexpensive, organic, antibacterial, draped well, and was available in several stylish colors. Lauren used it to make jogging suits to wear at the gym. Chrissy took a six-month break from acting and came home to South Carolina to unwind. On a visit to Charleston, she commented on Laurens attractive lounge wear. When Lauren confessed thatshethe clothes, Chrissys eyes lit up. Honey, I havecreated friends who would pay a fortune for something this comfortable and fashionable. You can wear this to shop on Rodeo Drive, to work in the garden, or to sit and just watch a movie. To this Lauren quipped, Or to run after speedy kids. They settled on the name, Saucy Gear, for their new clothing line. The girls each contributed $100,000 of cash to form a limited liability company (LLC) that would make and market the jogging suits and other bamboo clothing. They contacted their former boss in Greenville and commissioned Hadley Mills, Inc. to make $120,000 of clothing.
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Chrissy got to work. She pulled out her PDA  now loaded with all the hottest celebrity names and addresses. She and Lauren booked a suite at the Beverly Hills Regency three days before the Alpha Awards ceremony, and invited Chrissys friends to a private fashion show in their suite. They sent their guests home with gifts of garment bags packed with Saucy Gear. After everyone had left, Chrissy and Lauren collapsed in the sitting room. Theres not a stitch of Sauciness left in the building  we gave it all away! Chrissy laughed. Paparazzi captured pictures of the celebrities wearing the Saucy clothes, and the hot new fashion must haves were featured in a number of magazines. Within just a few months, the women had almost $1 million in orders. Age 39.ground, the Jordan family had a setback.Just as Saucy Gear was getting off the Charlotte was diagnosed with breast cancer. They found it early, so I know everything will be fine, she said. Still, Charlotte was severely weakened by the chemotherapy and found her spirits dwindling. Then, a few months later, Tylers older brother, Todd, suffered a heart attack at age 42. One night, after a fitful sleep, Tyler woke Lauren. Lo Lo, we can help Mom and Todd through this. This is what we trained for all those years. Were going to create a whole new type of rehab facility  a wellness center. Rehab is not just for people recovering from sports injuries; its also for people trying to recover from illnesses and other physical and mental challenges life throws at them. Within a month, Tyler resigned from McMillan, and Lauren and Tyler reopened the old ARC Properties building as the Wellness Zone (Wellness). Charlotte and Todd were their first patients. Wellness hired oncologists, cardiologists, psychologists, nutritionists, trainers, nurses, and others to provide a broad range of recovery assistance. Lauren reflected on her early years in near-poverty: Many people cant afford this help, she thought. So Tyler and Lauren established Wellness Zone Charities  a section 501(c)(3) organization to raise funds for grants to help lower-income patients. Age 45.After a few rough years, our Southern Royalty trio was back on solid ground. Saucy Gear received a $20 million (cash) buyout offer to become a division of KayStyle, Inc. Lauren and Chrissy would remain on staff as President and CEO, and would receive creative control of the division, a share of profits, and stock options. Tyler received a $30 million terminating distribution from his grandfathers trust. I had no idea! he commented with a dazed tone. Charlotte Jordan and her son Todd were fully recovered from their respective illnesses and represented models of what the Wellness Zone program could accomplish. On more than one occasion, Charlotte commented, Im so proud of you, Ty. You couldnt have picked a better field. As for our dear friend Chrissy, shes back in the movie business, working on a romantic comedy with her favorite co-star, Bart Pitz. Chrissy may even be back in the market for love. Last week, she ran into Zach Bronson, an old buddy from her days in the real estate business. (No, she didnt literally run into him  shes an excellent driver - even though she cant seem to find a safe parking space anywhere). Zach invited her to dinner, and the look on his face made Chrissy blush. Quickly recovering her composure, she grinned and said simply, Ill see if I can find something Saucy to wear.
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6 REQUIREMENTS NOTE:Your analysis is as important as your final conclusion. Be sure to support each answer by documenting your thoughts and citations, as well as showing your calculations. NOTE:that tax law in effect in 2008 applies during the time indicated in theAssume requirement. Unless otherwise indicated, assume each requirement is independent of the other requirements. NOTE:For any amounts that are inflation-adjusted under an Internal Revenue Code provision, use the base amount (per the IRC) in your response, and indicate that the amount is inflation-adjusted. Be sure to provide the citation for both the base amount and the inflation-adjustment provision. NOTE: are re uired to determine whether or not ouBe sure to check each re uirement to complete it. Some requirements are for graduate students only, some are for undergraduate students, and some are for both groups. Requirement 1. Undergraduate students only.Refer to Laurens letter from the Bursars office and the related attachments. During the year in question (freshman/sophomore year), Lauren received an athletic scholarship. Is any portion of the athletic scholarship taxed to Lauren? What other deductions or credits are available and which expenses qualify? Who can claim these deductions or credits? What planning opportunities exist? What additional information is needed? Requirement 2. Graduate students only.Refer to Chrissys letter from the Bursars office and the related attachments. During the year in question (freshman/sophomore year), Chrissy received an educational grant from Hadley Mills, Inc. She paid her remaining educational expenses with distributions from a Coverdell educational savings account (ESA). How is the grant treated for tax purposes? How are the distributions from the Coverdell account treated? What issues arise? What other deductions or credits are available and which expenses qualify? Assume contributions to the ESA were $20,000 and that the balance in the account before the current tax year was $30,000. Requirement 3. Graduate and undergraduate students.Why is real estate often owned by one entity with operating assets owned by a separate entity? What are the primary advantages of having real estate owned by a pass through entity rather than a Subchapter C corporation? Real estate is often owned by an LLC rather than a Subchapter S corporation because of the different ways in which the taxpayers basis is calculated. Describe the basis calculation rules and other provisions that, in general, might cause an LLC to be more advantageous. Why did Palmer say ARC Properties could use either an LLC or a Subchapter S corporation in this situation?
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Requirement 4. Graduate and undergraduate students.ARC is the entity that will operate the Jordans physical therapy business. Tyler is considering operating ARC either as a Subchapter C corporation or a Subchapter S corporation. Compare and contrast the issues that should be considered in determining which status to select.  Requirement 5. Graduate and undergraduate students.Assume ARC, Inc. is formed as a Subchapter C or Subchapter S corporation and that ARC Properties is formed as an LLC. ARC, Inc. and ARC Properties, LLC will incur entity formation costs in forming the respective entities. In addition, ARC, Inc. will incur pre-opening operating costs. How are these costs treated? What must be done to ensure the most favorable treatment is available? What is the advantage of the current rules in this area? Requirement 6. Graduate students only.Because of the anticipated cash shortfalls for ARC, Inc., Tyler has suggested a deferred-rental arrangement. Assume,for this requirement only, that ARC, Inc. is a Subchapter S corporation and ARC Properties is an LLC. How will the rental be treated under IRC §467? Describe the requirements and calculations required under §467 and support your answer; do not attempt to make specific calculations. Will Tylers idea (allow ARC to accrue rent expense while Properties defers the rental income) work? Requirement 7. Undergraduate students only.Tyler acquired and transferred to Lauren: 1) a 50% interest in ARC, Inc. and 2) a 25% interest in ARC Properties, LLC. Tyler paid for these ownership interests with funds distributed from his grandfathers trust. Assume these transfers to Lauren were irrevocable with no strings attached. How are these transfers treated? Requirement 8. Undergraduate students only.Describe the tax benefits that are available for Chrissys hybrid car purchase. Assume that the maximum credit under §30B(d) (as announced by the IRS) is $2,100. Also assume that Honda sold its 60,000thcar in 2007, and that the IRS has announced that Honda credits are subject to phaseout under §30B(f) starting in the first quarter of 2008. How much of the credit can Chrissy actually claim? In general, what treatment is available if Chrissy uses the car in her real estate business? What treatment is available if Chrissy only uses the car for personal purposes? Requirement 9. Graduate and undergraduate students.What is the effect of ARCs liquidating distribution on the corporation? What is ARCs taxable income or loss for its final taxable year and how is it treated? Do you have any recommendations to improve the tax results for ARC? Assume ARC paid tax at a 15% rate during each year in which a tax liability was due. Requirement 10. Graduate and undergraduate students.Upon liquidation of ARC, what gain or loss would the shareholders report on their tax returns? What is the character of that gain or loss? Describe any special treatment that may be available for this gain or loss.
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8 Requirement 11. Graduate and undergraduate students.In what situations is a taxpayer required to maintain inventory accounts for tax purposes? During each of its first seven years of operations, is Saucy Gear, LLC required to record inventories on its books? Why, or why not? Requirement 12. Graduate and undergraduate students.In general terms, describe the methods of accounting available to taxpayers. What methods of accounting are available to Saucy Gear, LLC in each of its first seven years of operations? How would your answer change if Saucy Gear was a Subchapter C corporation? Requirement 13. Graduate and undergraduate students.How will the sales price of the Saucy Gear, LLC assets be allocated among the assets that are being sold? Outline the tax rules that govern the allocation. How will Saucy Gear, LLC report this sale? How does KayStyle, Inc. treat the cost of acquiring these assets? Requirement 14. Graduate students only.Describe how a trust and a beneficiary are taxed on items of trust income. How is the character of the income determined? How does Tyler treat the annual distributions he receives from the trust as well as the $2 million and $30 million principal distributions he receives? What is Tylers basis in the assets he receives from the trust? What special tax issues must be addressed in the final year of the trusts existence? Refer to Tylers June (age 45) letter to Palmer and the final Schedule K-1 from the trust. Requirement 15. Graduate and undergraduate students.What documentation must Wellness Zone Charities provide to KayStyle, Inc. and to the fundraiser attendees? What amount will the fundraiser attendees be able to deduct? What amount will KayStyle, Inc. be able to deduct? Support your answers.
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9 [REQUIREMENT #1, UNDERGRADUATE STUDENTS ONLY] Bursars Office Carolina College Columbia, SC 29208December 31, [the middle of Laurens sophomore year in college] Ms. Lauren Nichols 3590 E. Pleasant Ridge Drive Greenville, SC 29607 Ms. Nichols: Following is a summary of the receipts and disbursements applied to and charged from your account during 20XX. This summary includes all amounts administered by this office. Please consult your tax advisor to determine the appropriate tax treatment. Receipts:  Athletic scholarship  Carolina College  Varsity Cheerleader award 6,000  Personal deposits to this account 14,000   Total receipts $ 20,000 Disbursements (total amounts for spring and fall, 20XX):  Tuition 8,500  Technology fee (required for all students) 500  Residence hall fees (spring 20XX) 3,200  Sorority residence fees (fall 20XX) 2,800  Meal plans 2,600  Books and supplies required for courses (per University book store) 1,200  Health services and insurance fee 900  Student activity fee 300   Total disbursements $ 20,000 Carolina College account balance $-0-Attached you will find Form 1098-T reflecting your tuition payments and scholarship awards for calendar year 20XX. We have also attached documentation received by this office regarding your scholarship. [NOTE to participants: Form 1098-T is not actually completed, as this might be too helpful for you in completing the requirement.] Copyright 2008 © Deloitte Development LLC  All Rights Reserved.
10 [REQUIREMENT #1, UNDERGRADUATE STUDENTS ONLY] Page 2 of Lauren Nichols’ letter from the Bursar’s office] If you need assistance at any time, you may call us at 1-800-555-1212. Press 7, then press 5. Wait 10 seconds, then press 2. You will be placed on hold for up to one hour, after which time you can leave a message. We will reply to your message within 10 business days. You may also visit our offices from 10:00 a.m. to 4:00 p.m. Monday-Friday (closed from 12:00 2:00 p.m. for lunch); please be advised, however, that lines usually extend out the door and around the building. All the best wishes for your academic success! June Graham Bursar Carolina College Bursar’s office motto: Helping the University run efficiently for hundreds of years! Excerpt from attachment 1: Lauren’s athletic scholarship award letter Dear Ms. Nichols: We are pleased to offer you a scholarship in the amount of $6,000 for each academic year in which you attend Carolina College. We anticipate that you will be a cheerleader participating at various university athletic events (described separately); however, these activities are not required as a condition of this scholarship. Your scholarship is renewable upon your maintenance of a 2.0 grade point average and continued selection by the athletic committee. We wish you the best in your academic career! Best regards, Steve Sparrier Steve Duke Sparrier Athletic Director Head Football Coach
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[REQUIREMENT #2, GRADUATE STUDENTS ONLY] Bursars Office Carolina College Columbia, SC 29208 December 31, [the middle of Chrissys sophomore year in college] Ms. Christine Morgan 3590 E Pleasant Ridge Drive Greenville, SC 29607 Ms. Morgan: Following is a summary of the receipts and disbursements applied to and charged from your account during 20XX. This summary includes all amounts administered by this office. Please consult your tax advisor to determine the appropriate tax treatment. Receipts:  Academic grant  Hadley Mills, Inc. 3,000  Personal deposits to this account from Coverdell ESA 19,000   Total receipts $ 22,000 Disbursements (total amounts for spring and fall 20XX):  Tuition 8,500  Technology fee (required for all students) 500  Residence hall fees (spring 20XX) 3,200  Sorority residence fees (fall 20XX) 2,800  Meal plans 2,600  Books and supplies required for courses (per University book store) 900  Health services and insurance fee 900  Student activity fee 300  Yearbook fee 200  Fine arts annual pass (not required for coursework) 1,200  Parking tickets 700  Parking permit 200   Total disbursements $ 22,000 Carolina College account balance $ -0-
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