The purpose of this assignment is for you to research the proper method for calculating deferred tax assets and liabilities. The Relevant Facts, Specific Issues, and Conclusions sections of the memo should be thorough but concise. The key portion of the memo will be the Support section, which should be properly supported by appropriate regulation citations (be specific with section, number, paragraph, and subparagraph as applicable). SCENARIO Chris and Sue are 50 percent shareholders in the BackBone personal service corporation. BackBone provides chiropractic services in four small towns: Troy, Union, Vista, and Willow. Chris is the main chiropractor in the Troy office, and Sue heads the Vista office. The two other offices have chiropractor employees running the practices, but that is where BackBone’s trouble lies. Charlie, the main chiropractor in the Willow office, does not see eye-to-eye with Chris and Sue on management styles. Charlie does not take well to any interference in how he runs the office, the hours he keeps, or the therapy techniques he employs. Firing Charlie is not an option for two reasons. First, it is difficult to find chiropractors who want to work and live in small towns. Second, and most importantly, if Charlie were to leave BackBone, he would start his own practice in Willow. He is very good with patients and easily would be able to take at least 80 percent of the clients in Willow. Sue and Chris have noticed that some of the patients in Union drive to Willow because they prefer Charlie to Joe, the chiropractor in their Union office. Chris and Sue do not want to compete with Charlie and would prefer that the practice come up with an arrangement that would make everyone happy. They already pay Charlie handsomely, so more salary is not the solution. For Charlie, it seems to be a matter of control. Chris and Sue may be willing to give up control of the Willow office, but they do not want to completely lose the profits this office adds to BackBone. Chris and Sue have come to you for some suggestions on how to solve this problem with the lowest tax cost. Provide BackBone with several options and the tax consequences of each. Support your conclusions with primary citations. Identified the relevant facts and specific issues of the scenario. All key relevant facts of the Tax Research Memo assignment are addressed in the response. The comments have a clear, logical flow. Major points are stated clearly. Major points are supported by good examples or thoughtful analysis. The memo presented the correct conclusion. The memo conclusion submitted was properly supported with a comprehensive explanation and applicable regulation citations. Spelling and grammar are correct. Sentences are complete, clear, and concise.

**Tax Research Memo** **To:** Chris and Sue, Shareholders of BackBone **From:** [Your Name], Tax Professional **Date:** [Today's Date] **Subject:** Options for Resolving Management Issues with Charlie and Associated Tax Implications --- **Relevant Facts:** - Chris and Sue each own 50% of BackBone, a personal service corporation providing chiropractic services. - Charlie, the chiropractor in the Willow office, has management style conflicts with Chris and Sue. - Firing Charlie is not feasible due to the risk of losing clients and the difficulty of finding replacements. - Chris and Sue are considering giving Charlie more control over the Willow office but want to retain profits. **Specific Issues:** 1. How can Chris and Sue resolve the management conflict with Charlie while minimizing tax costs? 2. What are the tax implications of potential solutions? **Conclusions:** Chris and Sue can consider the following options: 1. **Profit-Sharing Arrangement:** Allow Charlie to manage the Willow office independently while sharing profits. This can be structured as a bonus or profit-sharing plan, which is deductible for BackBone under IRC §162(a). 2. **Partnership or Joint Venture:** Form a partnership or joint venture with Charlie for the Willow office. This would allow profit-sharing while maintaining some control. Tax implications include partnership taxation under Subchapter K of the IRC. 3. **Stock Options or Equity Stake:** Offer Charlie stock options or a minority equity stake in BackBone. This aligns

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