Tax memo
prepare a tax research memorandum to the following problem.
C:11-67. One of your wealthy clients, Cecile, invests $100,000 for sole ownership of an electing S corporation’s stock. The corporation is in the process of developing
a new food product. Cecile anticipates that the new business will need approximately $200,000 in capital (other than trade payables) during the first two years of its
operations before it starts to earn a sufficient profits to pay a return on the shareholder’s investment. The first $100,000 of this total is to come from Cecile’s
contributed capital. The remaining $100,000 of funds will come from one of the following three sources: 1. Have the corporation borrow the $100,000 from a local bank.
Cecile is required to act as a guarantor for the loan. 2. Have the corporation borrow $100,000 from the estate of Cecile’s late husband. Cecile is the sole beneficiary
of the estate. 3. Have Cecile lend $100,000 to the corporation from her personal funds. The S corporation will pay interest at a rate acceptable to the IRS. During the
first two years of operations, the corporation anticipates losing $125,000 before it begins to earn a profit. Your tax manager has asked you to evaluate the tax
ramifications of each of the three financing alternatives. Prepare a memorandum to the Tax manager (citing applicable sources, such as the IRC) outlining the
information you found in your research.
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