Loose Leaf for Principles of Taxation for Business and Investment Planning 2019 Edition
22nd Edition
ISBN: 9781260161472
Author: Sally Jones, Shelley C. Rhoades-Catanach
Publisher: McGraw-Hill Education
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Chapter 10, Problem 4TPC
Marla recently inherited $50,000 and is considering two alternatives for investing these funds. Investment A is stock of a C corporation, expected to pay annual dividends of 8 percent. Investment B is stock of an S corporation. Based on income projections, Marla’s share of the S corporation’s ordinary income would be approximately $10,000 per year. However, the S corporation does not expect to make cash distributions for the foreseeable future. Marla would hold either investment for three years, at which time she believes the C corporation stock could be sold for $60,000 and the S corporation stock could be sold for $90,000.
Assume that the initial investment would be made in year 0, dividends on the C corporation stock would be received in years 1, 2, and 3; S corporation earnings would be allocated in years 1, 2, and 3; and either investment would be sold in year 3. Assume that Marla’s S corporation income would not qualify for the QBI deduction. Also assume that Marla’s marginal tax rate on ordinary income is 35 percent. Using a 4 percent discount rate, calculate the
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Chapter 10 Solutions
Loose Leaf for Principles of Taxation for Business and Investment Planning 2019 Edition
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