Toby Power, a fellow Illinois resident, is a new client. Prior to her telephone call this morning (late November), all you really knew about Toby was that for the past five years she has been earning a living as a respected golfing instructor at a local club. She just called you to discuss a transaction she has entered into. You learn from your initial conversation with her that she and a group of friends formed a corporation for which the group will own 100% of the stock.
The corporation will be in the business of selling golf balls that it guarantees are indestructible and, because they glow in water and shade, cannot be lost. Toby transferred an office building to the corporation in return for her 20% stock ownership interest. Her eight other friends transferred primarily manufacturing equipment and cash for their evenly divided 80% interest. Toby has owned the office building for seven years and currently owes several hundred thousand dollars on two mortgages on the building. She estimates the fair market value of the building is about $1,000,000.
Toby informs you that her previous tax advisor, about whom she has nothing but negative things to say, counseled her that in order to avoid paying taxes on the transfer of the building to the corporation, she had to also transfer to the corporation a personal promissory note of $ 100,000. All of this occurred last year. She wants to know if the transaction was handled correctly, or if she needs to worry.
a. Are there any additional questions you should ask the client before you begin your research?
b. What additional potential sources of information might you want to ask for?
c. Which of the preceding facts are relevant? Which are irrelevant?
d. Is there a chance that you will need to ask more questions at a later point? Why or why not?
e. What is the first question you will try to answer in your research? Are there any additional issues that you can identify at this time?
f. Is this a planning research type of situation? What do you believe the client wants?