please complete the following case study, in lieu of the problem set.

The below scenario is based on the real life tax situation of one of my clients, with fictitious names and figures (for privacy). Please apply your knowledge from readings and research to this case.

Mike and Rita are two partners in a retail distribution management business. They each contributed 50% of seed capital to start the partnership, M&R company. The entity was set up in Oklahoma in 2008, and has been profitable since its inception. In 2009, Mike moved his family to Costa Rica, while Rita moved to California.

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For the entire years of 2010 through 2012, Mike resided in Costa Rica, enjoying the international living. He traveled every month to the US on business, either for trade shows or client meetings. Mike has decided to stay in Costa Rica for a long term. He also has a daughter at 12, from his previous marriage, who lives in OK with her mother.

The business is doing well despite the global recession and uncertainty. It is projected that the net earnings of the business will be in $300K in 2012. For the past two years, Mike devoted majority of time to the business among the partners. The split between Mike and Rita is roughly 75% / 25%. This contribution will likely continue as most of the operation is located in Costa Rica.

Mike is now contemplating setting up another legal entity in Costa Rica, which likely will be a stand-alone entity from the existing entity, M&R.

What are the some tax considerations in Mike’s case? What are advantages and disadvantages of the new entity in Costa Rica?



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