a) Michael formed a new corporation by investing $200,000 cash. Following the advice of his tax consultant, Michael designated $120,000 to be used for the purchase of corporate stock and $80,000 as a loan to the corporation. What tax advantage does this arrangement have over structuring the entire investment as a purchase of stock? Explain.
a) Dorothy has $30,000 to invest and is considering a corporate bond that pays 7 percent annual interest or a non- dividend paying stock that is expected to appreciate 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?
b) 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 to the Code, such losses from passive activities cannot be applied as deductions to offset other types of taxable income. Advise Gabriel as to how he can salvage the $20,000 deduction.

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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 to be used for the purchase of corporate stock and $80,000 as a loan to the corporation. What tax advantage does this arrangement have over structuring the entire investment as a purchase of stock? Explain.
a) Dorothy has $30,000 to invest and is considering a corporate bond that pays 7 percent annual interest or a non- dividend paying stock that is expected to appreciate 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?
b) 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 to the Code, such losses from passive activities cannot be applied as deductions to offset other types of taxable income. Advise Gabriel as to how he can salvage the $20,000 deduction.

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