Tax Research Paper
74353
777 Cross St.
Moscow, ID 83843
May 4, 2012
Mr. Andy Squeeze
3471 Paradise Ridge Rd.
Viola, Idaho 83872
Dear Mr. Squeeze,
Currently, you own all of the stock in Valley Hardware Store Inc., a corporation that operates in Viola, Idaho. Mr. Broker, of Big Investment Company has given you 2 recommendations: the first recommendation is that you should move your investments in Certificates of Deposits(CD’s) to state and municipal bonds; the second recommendation given is that you should take out another mortgage as additional capital to also be converted into Municipal bonds. The purpose of which is to receive a double tax benefit offered by taking advantage of both the interest deductions on the new mortgage allowed under I.R.C. §163(a) and the tax exempt benefits on the interest payments of the state and municipal bonds allowed under I.R.C. §103(a). The resolution to these issues is solely dependent on whether or not the Courts will allow the interest on the debt to be deducted, if not, the investment will result in a negative impact causing your company to suffer a loss.
In regards to the first issue of whether or not you should transfer your investments in Certificates of Deposits to state and municipal bonds, this depends on if the Court’s allow you to continue deducting the interest payments on your debts. According to Bishop v. Commissioner 342 F.2d 757 (1965), the Courts found that the interest deductions sought by the taxpayer were not deductible, the reasoning behind their ruling was based on the fact that the interest on the tax payer’s indebtedness, that was claimed as a deduction, continued to purchase or carry tax exempt obligations which is excluded under the provisions of Section 265(a)(2). Under I.R.C. §265(a)(2), “Interest on indebtedness incurred or continued to purchase or carry obligations the interest on which is wholly exempt from the taxes imposed by the subtitle,” meaning a taxpayer cannot deduct interest on debt when
777 Cross St.
Moscow, ID 83843
May 4, 2012
Mr. Andy Squeeze
3471 Paradise Ridge Rd.
Viola, Idaho 83872
Dear Mr. Squeeze,
Currently, you own all of the stock in Valley Hardware Store Inc., a corporation that operates in Viola, Idaho. Mr. Broker, of Big Investment Company has given you 2 recommendations: the first recommendation is that you should move your investments in Certificates of Deposits(CD’s) to state and municipal bonds; the second recommendation given is that you should take out another mortgage as additional capital to also be converted into Municipal bonds. The purpose of which is to receive a double tax benefit offered by taking advantage of both the interest deductions on the new mortgage allowed under I.R.C. §163(a) and the tax exempt benefits on the interest payments of the state and municipal bonds allowed under I.R.C. §103(a). The resolution to these issues is solely dependent on whether or not the Courts will allow the interest on the debt to be deducted, if not, the investment will result in a negative impact causing your company to suffer a loss.
In regards to the first issue of whether or not you should transfer your investments in Certificates of Deposits to state and municipal bonds, this depends on if the Court’s allow you to continue deducting the interest payments on your debts. According to Bishop v. Commissioner 342 F.2d 757 (1965), the Courts found that the interest deductions sought by the taxpayer were not deductible, the reasoning behind their ruling was based on the fact that the interest on the tax payer’s indebtedness, that was claimed as a deduction, continued to purchase or carry tax exempt obligations which is excluded under the provisions of Section 265(a)(2). Under I.R.C. §265(a)(2), “Interest on indebtedness incurred or continued to purchase or carry obligations the interest on which is wholly exempt from the taxes imposed by the subtitle,” meaning a taxpayer cannot deduct interest on debt when