Week
3 Discussion 1
"Preferred
Stock Bailouts" Please respond to the following:
Section 306 of the IRC was enacted by Congress to
prevent tax avoidance by distributing certain stock to a shareholder in a
nontaxable stock dividend. Section 306 prevents shareholders from using a
preferred stock bailout to convert ordinary income into a capital gain. Analyze
the key provisions of Section 306 of the IRC, and outline a tax- planning
strategy geared toward redeeming preferred stock with sale or
exchange treatment as an alternative to Section 306.
From your analysis of Section 306 in the e-Activity,
differentiate between the tax treatment of earnings and profit on the
distributing corporation of both a sale of Section 306 stock and redemption of
Section 306 stock. Suggest the most important reasons for this differentiation
in tax treatment.
Week
3 Discussion 2
"Personal Holding Company" Please respond
to the following:
Per the text, the personal holding company (PHC) tax
penalizes taxpayers that enter into tax-motivated transactions designed to
shelter passive income of closely held corporations from higher individual tax
rates. Suppose you represent a professional athlete who is the majority owner
of a corporation. The corporation has several personal service contracts with
advertising agencies and endorsements for your client in addition to passive
income. Propose a plan in which you eliminate the potential for the PHC tax on
the client’s corporation.
The same client provides significant information on
passive income at the end of the year, creating a potential PHC tax liability.
Outline a plan for the current year in which you reduce the total tax liability
for the client and include a proposal for future years to prevent PHC tax
liability.
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