2008 Deloitte Tax Case Study Competition National Case Study In the 2008 Deloitte Regional Tax Case

Study, you met Tyler Jordan, Lauren Nichols, and Chrissy Morgan. We called the trio Southern Royalty for good reason! In this 2008 Deloitte National Tax Case Study, you will learn more about their families and their stories, and you will advise them on the tax treatment of the opportunities they encounter. Meet the people (and their businesses) again. First, well look back at the people you met (and the things they did) in the Regional Tax Case Study. Be sure to read this part, because weve added some extra information. Tyler Jordan. Tyler is the youngest son of Mike and Charlotte Jordan, a wealthy family from Charleston, South Carolina. Mike Jordan was a pro football Hall of Fame star, and Tyler inherited much of his dads talent. Tyler quarterbacked on championship teams at Carolina College (CC). He even won the conference championship game his sophomore year with an off-balance pass for a touchdown. Sadly, that pass cost him his pro career during the play he suffered a severe knee injury from which he never fully recovered. But the injury gave him a vision that would shape his life. Tyler decided to study for, and later received, a Doctor of Physical Therapy degree. After working in a physical therapy (PT) clinic for a couple of years, Tyler and Lauren (his wife) formed their own PT clinic the Athletic Recovery Center (ARC). ARC was later liquidated as the result of a downturn in economic conditions. A few years later, Tylers mother (Charlotte) and brother (Todd) became ill within a few months of each other. Charlotte was diagnosed with breast cancer, and Todd suffered a heart attack. This family crisis spurred Tyler and Lauren to resurrect and significantly enhance their physical therapy center concept. They reopened their doors as the Wellness Zone, a facility staffed with doctors, oncologists, cardiologists, nurses, nutritionists, and other specialists. The Zones goal is to help patients with all aspects of rehabilitation from life-threatening or debilitating illnesses and diseases. As we will see later, the Wellness Zone has been well received and is expanding. Lauren Nichols and Chrissy Morgan. Lauren and Chrissy are cousins from an almost middle class family in Greenville, South Carolina. The girls lived with Chrissys mom (Laurens aunt), Kate Morgan, until they graduated from high school. Then they headed to CC, where Lauren was a cheerleader, and Chrissy was on the dance squad. Lauren received a Doctor in Physical Therapy degree. She and Tyler completed their degrees together, married each other, and were co-founders of the Wellness Zone rehabilitation facilities. They also became the proud parents of three incredible children Jake, Samantha, and Baby Chrissy. After college, Chrissy Morgan moved to Los Angeles, where she first worked as a real estate agent and sometimes actress. Her real estate career was lucrative, but it didnt
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2 last long. Chrissy was enthusiastic about auditioning, and, within just a few years, she was an A-list actress with the expenses that go along with a successful acting career: she had people and had to pay them. Kate Morgan instilled in her girls Lauren and Chrissy the belief that they could create their own futures, regardless of their economic background. And create they did! After successful individual careers, Lauren and Chrissy developed a clothing line, Saucy Gear. Saucy will soon be worn around the world as it was recently acquired by KayStyle, Inc. for $20 million. In that purchase, it was agreed that Lauren and Chrissy would remain on staff as President and CEO, respectively, of the Saucy Gear division. They will receive creative control of the division, a share of ongoing profits, and stock options in KayStyle, Inc. Kate Morgan. During her entire career, Kate worked for Hadley Mills, a Greenville, South Carolina textile manufacturing company. She was eventually promoted to Vice President of Production. Kate was all about lifestyle and not about showiness. She had a pleasant, but small, house in Greenville, and saved as much money as she could spare. I want to see the world, and I dont plan to work myself into the grave! she had been known to say. She retired a few years ago at age 50. True to her word, Kate has spent much of her time since retirement cruising, mountain climbing, visiting the sets of Chrissys movies, and serving on missions to Mexico and Africa for her church. Mike and Charlotte Jordan. Mike and Charlotte Jordan are the parents of Todd, Ted, and Tyler Jordan. Mike Jordan was a football hero from CC who later was a pro star for a New York team. He and Charlotte met years ago in the Rainbow Resort, high atop The Rockingham Center in downtown Manhattan. Charlotte was serving an internship with Goldberg Sikes Investment House at the time. Her father insisted that she work in the markets for a time to develop some of the skills (and meet some of the contacts) she would need in running the familys business, McMillan Imports, Inc. Charlotte inherited 55% of the stock in McMillan from her father, Walter McMillan. The remaining 45% of the company stock was left in trust: 15% to each of his grandsons, Todd, Ted, and Tyler. Charlotte served as fiduciary (trustee) of each (grand)sons trust. Each trust terminated when the respective beneficiary (grandson) reached age 45. All the trusts now have matured and the grandsons own their stock outright. Charlotte is currently the President of the company, and her eldest son, Todd, is the CEO. All of the Jordan sons are on the McMillan Board of Directors. With their recent scares from Charlottes breast cancer and Todds heart attack, the Board has recognized the importance of focusing on succession planning for the business. Walter McMillan. Walter McMillan was Charlottes father. He was the great-grandson of Seamus McMillan, who founded McMillan Imports in the early 1800s. Walter was the only McMillan descendant who stayed in the business, and he served as president and majority shareholder of the company until the day he died. Charlotte was the only child of Walter and Shirley McMillan.
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3 In addition to the McMillan Imports stock, Walter left a sizeable amount of other assets to Charlotte and, in trust, for his three grandsons. Tyler Jordan received various distributions from his trust, including a terminating distribution of cash ($5 million after tax), investment assets ($3 million value), 2,500 acres of land ($4 million value), and 15% of the stock in McMillan Imports ($18 million value). Now, heres the rest of the story. You now know most of the players, but there are a few twists yet to the plot: American Fitness Group. As you saw in the Regional Tax Case study, Tyler and Lauren received quite a bit of cash in a very brief period of time. Tyler received $5 million of cash from his grandfathers trust. Around that same time, Lauren received almost $7 million (after taxes) for her interest in the Saucy Gear assets. They invested a sizeable amount of this cash into the Wellness Zone and opened additional facilities throughout the area they soon were operating 10 facilities in South Carolina. Tyler identified a group of 20 existing rehabilitation facilities, the American Fitness Group (AFG), located in North and South Carolina and Georgia. Tyler and Lauren developed a rapport with seven of the 10 owners of AFG. Three of the AFG owners, however, were nearing retirement and didnt want to join a new company. The parties agreed to merge AFG with Wellness Zone and to liquidate the interests of those shareholders who wished to retire. There are now 30 facilities operating under the Wellness Zone name. [Realistically, each facility would be formed as a wholly-owned subsidiary; for our purposes, assume all facilities are encompassed in one company the Wellness Zone, Inc.] Zach Bronson Realty. Now, back to the West Coast. When Chrissy moved to Los Angeles after college, her first job was with a real estate development company called Zach Bronson Realty. The company developed residential real estate subdivisions and then sold the houses. Chrissy always said she loved to shop, adding, and its so much fun shopping for houses with other peoples money! The owner, Zach Bronson, Sr. (Senior) was impressed with Chrissys hard work and spirit and hoped perhaps some of her ambition would rub off on his son. Zach Bronson, Jr. (Zach) was a California boy with all the attendant stereotypes. Zach had been a Delta Omega Gamma ( or DOG) at the best party school in the West. And, as you may recall, Chrissy was a Chi Alpha Tau ( or CAT). So, history repeated itself, and, at first, Zach and Chrissy fought like s and s. Zach was responsible for summarizing financial information for his father to review. Senior asked Chrissy to help Zach pull together some of the information for the corporate tax return. Zach, you need to understand the difference between what is reported on the books and what you deduct on the tax return, Chrissy noted. She hated sounding like her old nemesis, Professor Voldemerte, but Zach was a student with an attitude! She never realized that Zach actually knew what he was doing and just enjoyed the glint in her eyes when she was frustrated. He always managed to make her laugh before the work day ended, and, gradually, Chrissy found herself liking Zach. Soon afterwards, Chrissy had a huge acting break. She left the company, and she and Zach lost touch.
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Now, almost 20 years later, Zach has built on Seniors business model. Zach Bronson Realty, Inc. is a respected residential housing empire throughout the Sun Valley area. The last two years had been extremely profitable, but in the real estate world, things change quickly. Zachs current, priced-out land inventory shows losses on several prime parcels of real estate. His quick mind looked at the numbers and saw a cash flow opportunity. Id sure like to be able to recognize some of that loss and recover some of the tax I paid the last two years, he mused. His long-time accountant, Clark Fogerty, helped him determine what to do, and, in the process, unknowingly helped Zach and Chrissy become reacquainted. (Even after two divorces, our friend Chrissy is not one to give up on finding true love. As you may recall, when we last saw her in the Regional Tax Case Study, Chrissy was about to go on her first date with Zach Bronson.) Tylers land swap. Tyler didnt know what to do with the 2,500 acres of land he inherited from his grandfather. Grandfather Walter had inherited it from his grandfather, and nothing had ever been done with it. The land was a bit on the swampy side, not fertile enough for most crops and too far from the big cities for residential development. The property was also difficult to get to from Charleston. It was a puzzle to him. One day Lauren mentioned a dilemma at KayStyle. Bamboo fiber yields the perfect fabric for the Saucy line of clothes and I cant find any in this entire world! It looks like the Chinese producers are selling the bamboo elsewhere all of a sudden. We should try to grow it here so we have a steady supply. Tyler looked at the maps of his grandfathers land. This land is perfect for bamboo. Bamboo is already growing in the area its within just a few miles of the Bamboo Resource Center near Savannah. Then he grinned, asking, Do you want to get KayStyle into farming? Lauren laughed, Can you imagine Liz driving a tractor? Seriously, though, maybe Hadley Mills would buy it, farm it, and make the fabric for KayStyle. Lauren called her Aunt Kate, the former Vice President of Production at Hadley, and broached the idea. Kate had retired several years earlier, but she gave Lauren the name of a contact person with the company. As Lauren was hanging up the phone, Kate mentioned, tentatively, You know, Hadley owns some property near the CC campus that Tyler might be interested in. Its near the river, and its gotten fairly pricey, but its probably about the same value as Tylers land. At one time, Hadley farmed it, but lately theyve just let it go. At least then Tyler would own some property with better investment potential. Hadleys property was relatively small about 260 acres. It included a couple of buildings that were being leased to the county as a library. Tyler and Hadley agreed to the swap, and Tyler became a landlord. The land contribution. A few years later, the countys lease ended, and the library moved to a brand new building on county-owned land. By this time, continuing development had left Tylers land as about the only open ground in the area.
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One summer morning, Tyler was reading the CC Alumni News and noticed an article stating that CC wanted to acquire about 125 acres of land near the campus for a nature preserve and park. It would have walking and bicycling trails throughout, and it would be open for public enjoyment. CC planned to structure the land ownership so it would be a qualified conservation property, but the first step was to locate the land. You could donate 125 acres, and the value of the remaining land would probably increase because it is near a park, Lauren noted approvingly. The celebration. The land donation was completed, and, at the first home football game of the season, CC planned a celebration with fireworks after the game to honor the Jordan family. Because this was a football game, CC took the opportunity to bring three generations of football stars onto the field before the game. Yes, Jake Jordan was now a junior and starting quarterback at CC. He took the field before the game with grandfather, Mike Jordan, and father, Tyler Jordan. The stands exploded with whoops and cheers. The entire family was in the stands for the occasion. Charlotte was seated with her nonfootball sons, Ted and Todd, and their families. Lauren sat in front of them. Her girls, Samantha and Baby Chrissy, were in the cheerleading squad on the sidelines. Lauren turned to her actress cousin, Chrissy, and asked with a grin Notice anything familiar? Chrissy smiled and leaned into Zachs arms to get cozy for the ceremony. Finally, Aunt Kate was spotted, tripping up the stadium stairs withwho was this handsome man? It looks as if she brought a new friend back with her from her last trip to France. After the ceremonies, Mike and Tyler joined the rest of the family in the stands. Worries about KayStyle, Bronson Realty, McMillan Imports, and the Wellness Center were long forgotten as all attention was focused on the game. Nothing else was this important! CC was down 20-17 with only three minutes left in the game. Mike shouted, Hes going to pass it, Ty. Just before he could be sacked, Jake threw a bullet from the 18-yardline into the waiting arms of the receiver standing at the goal line. Hes in for the touchdown!! shouted the announcer. Everyone was shrieking excitedly, but Tylers eyes were glued to his sons helmet the only thing visible under a pile of uniforms. After what seemed like an eternity, the players untangled themselves, one by one. Finally, Jake stood up, and grinned in the direction of his parents in the stands. No injury this time, Dad! he mouthed We did it.

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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: Assume that tax law in effect in 2008 applies during the time indicated in the 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 (IRC) 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: Be sure to check each requirement to determine whether or not you are required 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. As a single-member Limited Liability Company (LLC), what are the options for taxing Chrissy Morgan, LLC? If Chrissy wishes (and is able) to be taxed as a sole proprietor, what must she do to ensure this treatment? On what forms and schedules will Chrissy report the income and expenses from her acting engagements? See the regulations under Section 7701 for guidance and support your answer. Requirement 2. Graduate and undergraduate students. Refer to Chrissys letter to Clark Fogerty. Chrissy incurred various expenses related to her acting engagements. Which of these expenses are deductible? Which are not? Do any limitations apply to the deductibility of these expenses? Support your answers. Requirement 3. Graduate and undergraduate students. Heres your chance to be a rock star in the tax consulting world! If Chrissy only deducts the expenses listed in her letter to Clark Fogerty, she is leaving a lot on the table. As a business owner (selfemployed), what additional expenses might she be able to deduct? What requirements must be met in order to claim them? Just include major categories of expenses (e.g., dont say pencils), and support your answer with citations. Be practical and imaginative and think about Chrissys overall business and tax situation. You should be able to come up with five or more major categories. Requirement 4. Undergraduate students only. Refer to the letter from Elizabeth Clairmont. Describe the rules that apply to publicly-held corporations regarding deductibility of officers salaries. If Lauren and Chrissy ARE covered employees, what portion of their current year compensation will be deductible? How does your answer change if they ARE NOT covered employees?
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Requirement 5. Graduate and undergraduate students. Lauren received incentive stock options (ISO) to purchase specified shares of KayStyle, Inc. stock. What are the requirements of an ISO? Assume the options are granted on July 1, 2008 (when the stock is trading for $32) and exercised at $36 on December 1, 2008 (when the stock is trading for $40). Also assume that Lauren remains an employee of KayStyle. Discuss the tax treatment of the ISOs to KayStyle and Lauren on the grant date and the exercise date. What is the result if the stock acquired with the ISO is sold for $48 per share on July 15, 2010? July 15, 2009? Show relevant calculations. Requirement 6. Graduate students only. Now assume Lauren is subject to alternative minimum tax (AMT) each year. Again assume the ISOs are granted on July 1, 2008 (when the stock is trading for $32), exercised on December 1, 2008 at $36 (when the stock is trading for $40), and that Lauren remains an employee of KayStyle. Discuss the AMT treatment of the ISOs to Lauren on the grant date and the exercise date. What is the AMT result if the stock acquired with the ISO is sold for $48 per share on July 15, 2010? What is the result if Lauren is NOT subject to AMT in the sale year (2010)? Show relevant calculations. Requirement 7. Graduate and undergraduate students. Refer to Kate Morgans letter to James Hardiman and answer her questions regarding her retirement accounts. What is a Roth IRA? What are the advantages and disadvantages of this type of retirement account? What are the requirements for converting a traditional IRA account into a Roth IRA? What are the tax consequences of such a rollover or conversion? Would it make a difference to Kate if the conversion was completed this year versus next year? Requirement 8. Graduate students only. Complete the letter from Palmer Harmony to Charlotte Jordan (dated June 10 of the year Charlotte was diagnosed with breast cancer). In separate paragraphs, address the following: 1) benefits of recapitalization from an estate planning perspective, 2) benefits from a gift tax perspective, 3) recognized gain or loss on recapitalization, 4) shareholders basis in stock received, and 5) possible timing of eventual estate tax payment under 6166. You can address many of these items in a few sentences. However, please provide support for your answers and remember that you are writing a letter to a client. Requirement 9. Graduate students only. Describe how a statutory merger (Type A) could be used to accomplish the merger of Wellness Zone, Inc., and American Fitness Group, Inc., including the buy-out of retiring shareholders. What are the requirements of a Type A reorganization? What are the advantages and disadvantages? Would a Type B or Type C reorganization be as effective in this situation? Why or why not?

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Requirement 10. Graduate and undergraduate students. Refer to the worksheets for Zach Bronson Realty. Describe how and when accrual-basis liabilities may be deducted for tax purposes. In Year 2, how much would be deducted on the tax return for each of the liabilities shown in the Accrued Liability Detail? Show your calculations and describe the tax rules that apply to the specific item. Use the most favorable assumptions possible to deduct the amounts at the earliest possible time. Requirement 11. Graduate and undergraduate students. Refer to Zachs letter to Clark Fogerty. Zach wants to increase the current year loss and then use it. What is the benefit of his plan? How can a land sale be structured that would meet Zachs objectives? What would be the tax result of the land sale losses? Which tax years would be affected by Realtys current year tax loss? Requirement 12. Graduate and undergraduate students. Refer again to Zachs letter. What are the hoped-for tax benefits of buying such a large amount of furniture in 2008? Can Realty deduct tax losses from the furniture rental activity? Support your answer and provide suggestions. Assume the furniture is the only personal property purchase Realty makes during the year. Requirement 13. Undergraduate students only. Refer to Zachs letter to Clark. Assume that Zach is correct that Realty has sold 400 homes that are eligible for the new energy efficient home credit. How much is the total credit? How can the credit be utilized? How will it affect Realtys cash flow situation? Assume the tentative minimum tax is 20% of taxable income and that this amount is higher than 25% of the excess tax over $25,000. Requirement 14. Graduate and undergraduate students. Refer to Tylers letter to Palmer Harmony dated August 1, [a couple of years after Tyler inherited land from his grandfather]. How would each of the two proposed options be treated under the like-kind exchange provisions? What requirements must be met? How much gain or loss would Tyler realize and recognize? What would be his basis in the property received in the exchange? Support your answer and provide citations. Requirement 15. Graduate students only. Refer to Tylers letter to Palmer of July 15, 2008. Assume the proposed land donation is a qualified conservation contribution valued at $3 million. What amount will be deductible in the current tax year? When can any remaining amounts be deducted? Requirement 16. Undergraduate students only. Refer to the letter Mike Jordan received from the CC Athletic Department. May Mike deduct any portion of the $16,000 he paid for football tickets? If so, how much? Support your answer.

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Chrissy Morgan, LLC Ms. Christina Morgan, Owner 839 Hollywood Hills Blvd. Beverly Hills, CA 90210
December 15, [Chrissys first successful year as an actress] Mr. Clark Fogerty, CPA 3260 Walk of Fame Drive Hollywood, CA 90027 Dearest Clark, Help!! You have been my hero ever since my days at Zach Bronson Realty just after I moved to California. I know youll come through for me again! Ive accumulated tons of paperwork related to my acting jobs this year. I have a business degree, but I might just shoot myself if I have to figure out my own tax situation! This year, I worked on three movies Daredevil Darlings, Summertime Magic, and Maid in the USA. The first two movies were Indys, or independent films produced by LLCs formed just for the movie. For these films, I paid my own expenses, and I received a contractual fee conditioned on the movies actually making money. (Fortunately, both films were relatively successful.) My latest movie was produced by Paragon Movie Studios. I cant wait for you to see it! Paragon paid all my expenses for that one and also paid me a handsome fee. All three companies are treating me as an independent contractor instead of an employee. As you may recall, I operate my acting business as an LLC, per your earlier advice. For what its worth, I use the cash method of accounting. My assistant, Angel (dear boy), has pulled together the following information. Income: Daredevil Darlings, LLC Summertime Magic, LLC Paragon Movie Studios, Inc. Total Income Expenses: Martha Hardman, agent (15%) Angel Juarez, full-time assistant and publicist (6 months) Security Services Agency (for security guard services) $ 1,000,000 1,000,000 8,000,000 $ 10,000,000 $ 1,500,000 150,000 200,000

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10 Tax letter from Chrissy to Clark Fogerty Page 2 of 2 Expenses (continued): Travel to Nevada for Daredevil Darlings movie Airfare flew to Las Vegas each week for six weeks Lodging Meals Travel to France for Summertime Magic movie Airfare 60 days of lodging (including 10 days of vacation) Meals (including 10 days of vacation) Plane ticket for Angel to accompany me to France as my first assistant Plane ticket for Kate Morgan (mother) to accompany me to France as my second assistant Gifts to directors and casting professionals (about 20 donees) Clothing for Oscar Awards ceremony (I get rave compliments every time I wear this outfit!) PDA/cell phone purchase (my old one pretty much exploded from overuse) Office supplies and expenses (my brand new office and studio are located in a separate suite in the house I bought in May of this year)

2,000 6,000 3,000 3,000 18,000 9000 3,000 3,000 2,000 8,000 1,000 200

Please tell Angel what I need to do. Also, let him or me know if you can think of anything else that would lower my taxes. This is a different world from last years $30,000 of income, isnt it?!! Im probably toast I think I have only paid about $5,000 toward this years tax bill. Cheers!

Chrissy
Chrissy Morgan P.S. Let me know if you can come to the Maid premiere should be a blast! Ill pick you up in my new Porsche Carrera. I still like to drive myself instead of hiring a driver, although I still always seem to get parking tickets!! [Later, it turns out that Clark becomes ex number one, but he will always be Chrissys hero from this time in her life. After Clark left the scene, Angel became husband and later ex number two.]
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Elizabeth Clairmont, President KayStyle, Inc. 2500 E Pasadena Ave. Highland Park, CA 90042

July 1, [soon after KayStyle purchased Saucy Gear] [NOTE: Chrissy Morgan received a similar letter describing her identical compensation from KayStyle.] Mrs. Lauren Jordan 23 Legrange Street Charleston, SC 29401 Dear Lauren, Welcome to the KayStyle family! We are proud to offer our marketing and distribution infrastructure and our corporate expertise to ensure Saucy Gear is available worldwide within the next year! KayStyles purchase of Saucy Gears assets is described more fully in separate documents. This letter outlines our agreement with respect to your personal compensation from KayStyle. Annual compensation. KayStyle is a publicly-traded corporation. You will receive cash compensation for the remainder of this year (July 1 to December 31) as follows: $1 million from KayStyle, Inc. 1% of all sales revenues of Saucy Gear products 7% of sales revenues of Saucy Gear in excess of $20 million Your compensation for the following five years will be based on the above amounts of current year compensation, annualized, and increased by 5% per year for inflation. For example, you will receive $2.1 million in salary next year, 1% of all Saucy sales, and 7% of Saucy revenues in excess of $42 million. This compensation package was determined by a compensation committee of outside directors and was approved by the shareholders of KayStyle, Inc. The compensation committee will certify any amounts due under the percentage awards before payment is made to you.

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12

Stock options. In addition, on occasion, you will be granted options to purchase stock of KayStyle, Inc. These options must be approved by the board pursuant to a plan developed for all employees. At the shareholder meeting last week, a stock option award was approved. Under this award, you will be offered options to purchase up to 2,000 shares of stock for $36 per share. The stock is currently trading for $32 per share. The options can be exercised at any time within the next 3 years. Please review, sign, and return the enclosed employment agreements, and welcome to the family! Sincerely,

Liz
Elizabeth Clairmont President, KayStyle, Inc.

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13

Ms. Kate Morgan 3590 E. Pleasant Ridge Drive Greenville, SC 29607

December 1, [when Kate Morgan is age 50] Mr. James Hardiman, CPA 169 E. Blue Ridge Drive Greenville, SC 29602 Dear Jim, Retirement is amazing! I have never enjoyed any time in my life more than I have enjoyed the last six months. I am writing to check with you to find out whether I need to adjust my investments before the end of this tax year. At the end of last year, I had about $750,000 in after-tax investments (plus my house and car, which I own free and clear). I also had $100,000 in my traditional IRA. I have made nondeductible contributions to my IRA for my entire working career, and my basis in my IRA is $40,000. With this soured economy, I lost money in these accounts. As of last month, my investments were valued at about $720,000. My IRA recently sank to a value of about $75,000, but the fund has adjusted its investments, and I expect the value to bounce back pretty quickly. I have heard that I might be able to convert the traditional IRA into a Roth IRA. I was never able to contribute to a Roth IRA, because my income was too high, but my income will be only about $80,000 this year (I worked half the year), and it will be much lower next year. I dont expect to need any of the IRA assets for about 15-20 years because I have plenty of after-tax money, and Chrissy sends me $10,000 or so each year. Also, Hadley Mills is a union company, so when I reach age 55, I will receive a nice annual pension. Here are my questions: What are the advantages and disadvantages of a Roth IRA? Can I roll my traditional IRA account balance into a Roth IRA account? What are the requirements and tax consequences if I do that?

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Please let me know what I should do as soon as possible. Its a rough life, I know, but I am headed to Paris for the holidays, and Ill be scurrying around getting ready until then. Thanks so much for your help!

Kate
Kate Morgan

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Mr. Palmer Harmony, Esq. Harmony & Justice, Attorneys at Law 125 Blue Oak Drive Charleston, SC 29492
June 10, [the year Charlotte was diagnosed with breast cancer] Mrs. Charlotte McMillan Jordan 300 Battery Street Charleston, SC 29401 Dear Mrs. Morgan, After over 40 years of working with the Jordans, any setback you face feels like an affront to my own family. I was saddened to hear of your battle with breast cancer, but I am pleased to hear that you are fighting valiantly and winning the war. As you requested, I have examined various alternatives for transitioning control of McMillan Imports to the next generation of your family. This letter outlines my recommendations. Situation. At this time, McMillan has a single class of common stock that is owned 55% by you, and 15% each by your sons, Todd, Ted, and Tyler. The most recent valuation of the corporation indicates the total value of the stock owned by all parties is approximately $120 million, after considering appropriate discounts for minority ownership and lack of liquidity. At present, your $66 million ownership of this company represents approximately 60% of your total net worth of $110 million. You have indicated that you wish to retain control over the company. Traditionally, the corporation has not paid significant dividends; however, you indicated that required dividend payments would be a welcome change in corporate strategy. Recommendation. Before making my recommendation, I considered other options, such as direct sales of the stock from you to your sons, waiting until the stock is transferred at your death, entering into a buy-sell agreement with the company, and other intriguing ideas. While we may revisit some of those possibilities in the future, at this point, I think McMillan should focus on recapitalizing the corporation.

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16 Recapitalization. Specifically, I propose the following: All common shares of McMillan would be surrendered. Those shares would be replaced with a new issuance of 1) common stock, and 2) voting preferred stock paying a low cumulative dividend. [The low dividend payment rate is warranted under current economic conditions; in addition, in spite of your illness, you still have a long life expectancy because of your young age 62 is quite young from my advanced perspective.] The number and par value of preferred shares and the dividend rate would be established so that, on a present value basis, the preferred stock holds most, if not all, of the value of the corporation and has voting control of the corporation. Conversely, the new common stock would hold all remaining corporate value, which would be minimal. After the recapitalization, you would gift the (low value) common stock to your sons. [For requirement 8, the participants will complete this letter from Palmer to Charlotte.] Please keep up the excellent work in your fight with cancer. All the best to you and Mike,

Palmer
Palmer Harmony, Esq. Harmony & Justice, Attorneys at Law

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17 File Worksheet for Zach Bronson Realty, Inc. December 31, [20 years ago; Chrissys first year as an intern with the company] Page 1 of 2 Following is an excerpt from the book-basis (accrual basis) financial statements for Zach Bronson Realty, Inc. (Realty). These amounts are reported on the financial statements and are not indicative of amounts that might be deducted for tax purposes.

Financial Basis Balance Sheet Amounts Selected Accrued Liabilities (List does not include all accrued liabilities)

December 31, Year 1 Accrued liability detail: Charitable contributions (Note 1) Officers bonuses (nonshareholders) (Note 2) Officers bonus (100% shareholder) (Note 2) Accrued payroll taxes on salaries payable at year end (Note 3) Reserve for home warranty liabilities (Note 4) Total accrued liabilities 50,000 200,000 60,000 20,000 25,000 355,000

December 31, Year 2 30,000 225,000 75,000 28,000 20,000 378,000

Note 1: Charitable contributions were approved by the Board of Directors on December 15, Year 0 and Year 1 respectively. Assume that total annual contributions, including accrued amounts, are less than 10% of taxable income before the charitable contribution deduction. Note 2: All shareholder/officer and non-shareholder/officer bonuses were approved by year end for work performed prior to the end of the year. Note 3: Payroll taxes are owed on wages and salaries paid through the normal weekly/monthly compensation system. The related salaries and wages were for services performed by December 31 and were paid by January 5 of the following year. Accrued payroll tax obligations were paid by March 15 of the following year. Note 4: Realty accrues a reserve for manufacturing defects in the homes it builds. The reserve is based on historic claims and is not based on specifically identifiable claims.

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File Worksheet for Zach Bronson Realty, Inc. December 31, [20 years ago; Chrissys first year as an intern with the company] Page 2 of 2 Following is the account analysis for accrued liabilities for Zach Bronson Realty, Inc. (Realty) from 1/1/Year 2 through 12/31/Year 3.

Year 2 detail for accrued liability accounts: Date 12/31/Year 1 2/05/Year 2 3/15/Year 2 3/15/Year 2 3/15/Year 2 5/15/Year 2 6/15/Year 2 6/15/Year 2 Description Amount Accrual of year end liabilities $ 355,000 Payment of charitable contributions (40,000) Payment of officers bonuses (nonshareholder) (180,000) Payment of officers bonuses (100% shareholder) (60,000) Payment of accrued payroll taxes (20,000) Payment of warranty claim (Note 5) (20,000) Payment of remaining charitable contributions (10,000) Payment of remaining nonshareholder bonuses (20,000) Account balance (relates to warranty claims that were less than the amount accrued) $ 5,000

Year 3 detail for accrued liability accounts: Date Description Amount Balance forward $ 5,000 12/31/Year 2 Accrual of year end liabilities 378,000 2/05/Year 3 Payment of charitable contributions (30,000) 3/15/Year 3 Payment of officers bonuses (nonshareholder) (200,000) 3/15/Year 3 Payment of officers bonuses (100% shareholder) (75,000) 3/15/Year 3 Payment of accrued payroll taxes (28,000) 6/15/Year 3 Payment of remaining nonshareholder bonuses (25,000) 10/31/Year 3 Payment of warranty claim (Note 6) (20,000) Account balance (relates to warranty claims that were less than the amount accrued) $ 5,000 Note 5: Realty was notified in March, Year 2 regarding a claim against work performed in October, Year 1. This claim ($20,000) was paid in May, Year 2. Note 6: Realty was notified in September, Year 3 regarding a claim against work performed in December, Year 2. This claim ($20,000) was paid in October, Year 3.

Copyright 2008 Deloitte Development LLC All Rights Reserved.

19

Mr.ZachBronson,Jr. President ZachBronsonRealty,Inc. 1259SierraHills Chatsworth,CA91312

July 10, [A couple of years ago, during a recession following two tremendous growth years] Mr. Clark Fogerty, CPA 3260 Walk of Fame Drive Hollywood, CA 90027 Hi Clark, Well, it looks like the good times have rolled away from me, anyway. Things arent that bad, but I sure wasnt expecting to have a year like this after everything had been going so well! Over the last couple of years, you might remember that Bronson Realty, Inc. (Realty) reported record profits. Right now, Realty has a loss for the year, but it looks like next year could be pretty level again. Heres where the company stands for the last couple of years. Current year (projected for year) Last year Two years ago Three years ago Taxable income (500,000) 2,000,000 5,000,000 1,000,000 Tax paid -0680,000 1,700,000 340,000

So lets make lemonade, right? I mean, Realty is going to have a loss this year, so why not make it a huge loss? Cant we take the loss back a few years and get some of that tax money back? I have a couple of ideas. Land sales. When Realty had those huge sales (and gains) a couple of years ago, we put most of the cash back into land. Then the market crashed. Now, Realty probably has about $4 million in paper losses on the land inventory. The problem is that Realty doesnt really want to sell the land. It will be great for development in a couple of years; these things always come back around. So we were wondering if we could sort of sell it to ourselves. Right now, Senior owns 60% of Realty and I own 40%. What if we just sold the property directly to one of us?

Copyright 2008 Deloitte Development LLC All Rights Reserved.

20 For example, if I bought the property, I could make a modest down payment and then give Realty a note for the balance of the purchase price. It would be legitimate, and I would make payments on schedule. Realty has the loss, and I have the land. When the economy is better, I can develop it. What would we have to do to make this work? Furniture rental business. One of my buddies suggested Realty should get into the furniture leasing business. He said we could make a small down payment on a bunch of furniture that we would lease to tenants. We could take huge deductions when the furniture is purchased, and we would have overall losses on the furniture rentals. The leases themselves would cash flow; that is, we would receive more cash from the rentals than we would have to pay on the furniture loans. So, it sounds like a great idea to me. Realty manages several large apartment complexes, and people are always asking about 3- to 6-month furniture rentals. If we get started now, we can probably buy about $800,000 of furniture and have it leased by the end of the third quarter. Do you see any problems with that? New energy efficient home credit. Every home we build qualifies for the new energy efficient home credit available for homes that are certified under 45L(c)(1). It looks as if well sell about 400 eligible houses this year. Normally, we would sell about 600 homes in a year, but thats why we have the loss, I guess. Anyway, can we salvage any of that tax credit? Lets meet up on the golf course in the next week or so to talk about this. Keep it real, man!

Zach
Zach Bronson, Jr. President P.S. Send my greetings to Chrissy. I saw her last movie and she kept me laughing the whole time. [A few weeks later, there was one of those awkward moments when Clark mentioned that he and Chrissy had been divorced for 10 years. As he was teeing off, Clark laughed and said, Man, dont you ever read the tabloids? Zach had missed that story (along with the Angel part of the drama), but he rarely misses an opportunity. A few days later, he coincidentally ran into Chrissy on Rodeo Drive.]

Copyright 2008 Deloitte Development LLC All Rights Reserved.

21

Mr. Tyler Jordan 23 Legrange Street Charleston, SC 29401

August 1, [a couple of years after Tyler inherited land from his grandfather]

Mr. Palmer Harmony, Esq. Harmony & Justice, Attorneys at Law 125 Blue Oak Drive Charleston, SC 29492 Dear Palmer, This letter outlines the details of the proposed land exchange that I described to you over the phone today. Earlier this year, I inherited 2,500 acres of raw land near the Georgia/South Carolina border. The land was recently appraised at $4 million, and my basis in the land is $2 million. The land is a bit swampy, but Hadley Mills wants that land so it can grow bamboo. Hadley owns 260 acres of land near the Carolina College campus. That land is valued at $3.5 million. The land is deserted farmland except for a couple of older buildings on the edge of the property nearest the campus. Its pretty valuable, because it is near the riverfront. The buildings need a bit of sprucing up and some land improvements are needed (grading, fencing, etc.) for liability purposes. It seems like we have two options for this exchange: Option 1. Exchange the properties as is. We will surrender grandfathers land, and Hadley will surrender the Columbia property and will pay us $500,000 cash. Option 2. Let Hadley Mills complete the renovation (to our specifications) and then exchange Hadleys property in Columbia for grandfathers land.

Copyright 2008 Deloitte Development LLC All Rights Reserved.

22

Heres how the value of the (improved) land would be allocated under the two options: Land Building (unimproved value) Total as is value (Option 1) Building improvements Furnishings (personal property) Land improvements (grading, landscaping, etc.) Total after renovation (Option 2) $ 3,100,000 400,000 $ 3,500,000 100,000 200,000 200,000 $ 4,000,000

Please let us know which of these options works best for us for tax purposes. Best regards,

Tyler
Tyler Jordan

Copyright 2008 Deloitte Development LLC All Rights Reserved.

23

Mr. Tyler Jordan 23 Legrange Street Charleston, SC 29401

July 15, 2008

Mr. Palmer Harmony, Esq. Harmony & Justice, Attorneys at Law 125 Blue Oak Drive Charleston, SC 29492 Dear Palmer, Several years ago, you may recall, I received 260 acres of land near Carolina College in exchange for 2,500 acres of (almost) swamp land in South Carolina. [And incidentally, that swamp land produces tons of excellent bamboo!] It seems that CC is interested in creating a park in the area in which my 260 acres is located. President Martin proposed that I donate 125 acres to a separate Carolina Collegeowned organization named The CC Waterfront Retreat. There are no buildings or other structures on the portion of the property that would be donated. Waterfront would be a qualified organization that would hold the land and operate it as a qualified conservation property. Waterfront will raise funds to add walkways and bike paths, and it will build an education and welcome center for the property. It sounds like a playground and water features will be added, but that the property will primarily be a park-like nature preserve for regular use by the general public. The charitable contribution will consist of my entire interest in the 125 acres being donated (excluding mineral rights), and it will include no interest in the acreage that I am retaining. Under our agreement, the property must be held by Waterfront in perpetuity for the uses described above. The way CCs attorneys have presented it to me, this contribution would meet all the requirements to be a qualified conservation contribution for tax purposes. Im not sure exactly what that means, so I am hoping you will tell me.
Copyright 2008 Deloitte Development LLC All Rights Reserved.

24 An appraisal obtained by CC shows that the value of this 125 acres is about $3 million. For illustration purposes, lets say my basis in the property that will be donated is $1.2 million. Our combined AGI (mine and Laurens) is about $5 million per year. This year, we will have other cash contributions to charities of about $500,000. This is all new to me, so please let me know how this contribution will affect my tax situation. Best regards,

Tyler
Tyler Jordan

Copyright 2008 Deloitte Development LLC All Rights Reserved.

25

Carolina College Athletic Department 1590 Blossom Street Columbia, SC 29208

August 15, 2008 Mr. Michael T. Jordan 300 Battery Street Charleston, SC 29401 Dear Mr. Jordan: We are in receipt of your check for $16,000, as payment in full for: 12 Garnet-Level (50-yard line, box seats) season football tickets ($400 each) Diamond--Level contribution (required to obtain Garnet-Level seating) Total payment received $ 4,800

11,200 $ 16,000

In addition to supporting our fine Athletic program, your Diamond-Level contribution includes parking passes for each ticket (valued at $300 total ($25 per ticket)) and allows you and your guests to enjoy admission to our club lounge located below the press box ($500 value total ($42 per ticket)). You can even stay in the lounge and watch the game on our hi-def screens! Were looking forward to seeing you in the stadium. Go Team!! Eric Harmon Eric Harmon Athletic Director GO TEAM!!

Copyright 2008 Deloitte Development LLC All Rights Reserved.