Thomas and Nicole Eirgo have been married for 20 years and have three children, Candice, age 18, and twin boys, Trevor and Julian, age 12. Nicole has an undergraduate degree in accounting and worked in public accounting while Thomas was obtaining his law degree. Five years ago, they quit their jobs and started TechKnow, a C corporation that develops legal and tax software specifically for accountants and lawyers with high-tech clients. Thomas and Nicole work more than full time at TechKnow and have received only modest salaries. No dividends have been paid. The business has finally started to make substantial profits, but success, unfortunately, has brought problems. Thomas and Nicole have very different opinions regarding TechKnow's future. Thomas would like to continue to reinvest most of the profits for the development of software for other specialties, whereas Nicole would like to focus on the lines they have and enjoy their success by distributing some of the profits. Since they cannot come to an agreement, the earnings are being retained, and no new software is being developed. These business disagreements are having a disastrous effect on their marriage. The only solution Thomas and Nicole see is to divorce. As might be expected, Thomas and Nicole cannot decide on how to separate their owner-ship interests in TechKnow. Some options they are considering include redeeming Nicole's stock, having Thomas and/or the children buy the stock, or dividing the business in some manner between Nicole and Thomas. One thing Nicole has decided is to fulfill a lifelong dream of obtaining a doctoral degree in accounting. She will be entering a Ph. D. program in the fall, by which time the divorce should be final. Since Candice also will be attending college, she will live in an apartment with her mother. Thomas will keep the house, and the boys will live with him. Thomas will pay Nicole alimony and child support while she and Candice are in school. The terms and amounts of these payments will be determined at the time the divorce is final. Advise the Eirgos on the tax consequences of the above events. Support your conclusions with primary citations.
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