Question: Chris and Sue are 50 percent shareholders in the BackBone
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 important, 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 parties 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.
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