a)Michael formed a new corporation by investing $200,000 cash. Following the advice of his tax consultant, Michael designated $120,000 tobe used for the purchase of corporate stock and $80,000 as a loan tothe corporation. What tax advantage does this arrangement have over structuring the entire investment as a purchase of stock? Explain.
b)Dorothy has $30,000 toinvest and is considering a corporate bond that pays 7 percent annual interest or a non-dividend-paying stock that is expected toappreciate by 7 percent each year. Given that both investments are of similar risk, and the long-term capital gains tax rate is lower than the ordinary income tax rate, which option should Dorothy choose? Why?
c)Gabriel is the sole shareholder of a management-consulting corporation. In addition, he has invested in passive rental activities that generate $20,000 per year in passive losses. According tothe Code, such losses from passive activities cannot be applied as deductions tooffset other types of taxable income. Advise Gabriel as tohow he can salvage the $20,000 deduction.

Question

a)Michael formed a new corporation by investing $200,000 cash. Following the advice of his tax consultant, Michael designated $120,000 tobe used for the purchase of corporate stock and $80,000 as a loan tothe corporation. What tax advantage does this arrangement have over structuring the entire investment as a purchase of stock? Explain. 
b)Dorothy has $30,000 toinvest and is considering a corporate bond that pays 7 percent annual interest or a non-dividend-paying stock that is expected toappreciate by 7 percent each year. Given that both investments are of similar risk, and the long-term capital gains tax rate is lower than the ordinary income tax rate, which option should Dorothy choose? Why? 
c)Gabriel is the sole shareholder of a management-consulting corporation. In addition, he has invested in passive rental activities that generate $20,000 per year in passive losses. According tothe Code, such losses from passive activities cannot be applied as deductions tooffset other types of taxable income. Advise Gabriel as tohow he can salvage the $20,000 deduction.

Quizplus · Accepted Answer

The Answer of a)Michael formed a new corporation by investing $200,000 cash. Following the advice of his tax consultant, Michael designated $120,000 tobe used for the purchase of corporate stock and $80,000 as a loan tothe corporation. What tax advantage does this arrangement have over structuring the entire investment as a purchase of stock? Explain. 
b)Dorothy has $30,000 toinvest and is considering a corporate bond that pays 7 percent annual interest or a non-dividend-paying stock that is expected toappreciate by 7 percent each year. Given that both investments are of similar risk, and the long-term capital gains tax rate is lower than the ordinary income tax rate, which option should Dorothy choose? Why? 
c)Gabriel is the sole shareholder of a management-consulting corporation. In addition, he has invested in passive rental activities that generate $20,000 per year in passive losses. According tothe Code, such losses from passive activities cannot be applied as deductions tooffset other types of taxable income. Advise Gabriel as tohow he can salvage the $20,000 deduction.

A)Michael Formed a New Corporation by Investing $200,000 Cash