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Part 1

4-81 a:

Since Tim and Manuel are not required to guarantee their firm’s debt, it would be best if they organized their business as an LLC. Under an LLC, they could deduct more losses than they could as an S corporation because “they increase their basis by their share of the entities debt” (Spilker, 4-19).

4-81 b: Since Tim and Manuel are required to guarantee their firm’s debt, it would be best if they organized their business as an LLC just as they did in the previous answer. Section 1.1367-2(c)(1) states that a shareholder’s tax basis can be increased resulting from loans the shareholder makes to the corporation which would, in turn, increase the shareholder’s basis in the corporation. However, Rev. Rul. 70-50 Section 1374(c)(2)(A)(B) denotes that “not all loans from a shareholder to an S corporation result in a basis increase for the shareholder” and thus, cannot increase the shareholder’s basis. This is why it would make more sense for Tim and Manuel to organize under an LLC because they have fewer limitations and are ultimately able to deduct more in losses than they could if they organized under an S corporation.

Part 2:

1.

A member of AICPA should only sign a tax return if he or she “has a good-faith belief that the position has at least a realistic possibility of being sustained administratively or judicially on its merits if challenged” (Statements on Standards of Tax Services, 10). Therefore, it would not be appropriate for a member of AICPA to sign a tax return that had a less than 50% chance of being sustained if challenged.

2. A member of AICPA may rely on representations by the taxpayer if the member “has a good-faith belief that the position has at least a realistic possibility of being sustained administratively or judicially on its merits if challenged” (Statements on Standards of Tax Services, 10). That being

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