Chris and Sue are 50 percent shareholders in BackBone personal service corporation. BackBone provides chiropractic services in four small towns: Troy, Union,

RESEARCH ASSIGNMENT
Chris and Sue are 50 percent shareholders in 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 up the
Vista office. The other two offices have chiropractor employees running the practices,
but that is where the 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 willing 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 8o 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 would come up with some arrangement that would make everyone happy. They
already pay Charlie well; 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 your firm for suggestions on how to solve this problem
with the lowest tax cost. Your manager thinks that a corporate reorganization might be
a good alternative. She would like you to help develop this option. Create a tax
memorandum that identifies if any corporate reorganization would be available, be sure
to discuss how this should be structured and identify any issues associated with this
alternative. Be sure to support your conclusions with primary authority.