Corporate Taxation – 2 questions

1. Karen formed Grebe Corporation with an investment of $100,000 cash, for which she received $10,000 in stock and $90,000 in 9% interest-bearing bonds maturing in ten years. A few years later Karen loaned Grebe an additional $40,000 on open account. Grebe becomes insolvent in the current year and is adjudged bankrupt. Karen was the president of Grebe Corporation and was paid an annual salary of $30,000 for the past three years. Karen has no other employment. How will Karen treat her losses for tax purposes?

2. High Technologies, Inc. (“Hi-Tech”) is a small semiconductor company owned and operated by Thelma High and Allen Woody. Thelma and Allen formed Hi-Tech three years ago by each contributing $400,000 in exchange for 50% of the C’s common stock. Hi-Tech has been planning a major expansion of its manufacturing facility and has decided to seek outside financing. It recently approached Jennifer Leech about the possibil­ity of her investing $200,000 in Hi-Tech. After investigating the C’s financing position, Jennifer has decided to make the investment. Her objectives are to obtain maximum security while at the same time participating in Hi-Tech’s potential growth. Jennifer also is concerned about the rapid change in computer technology and would like to plan for the most favorable tax consequences in the unfortunate event that her investment in Hi-Tech becomes worthless. Consider to what extent Jennifer will realize her goals if, in the alternative, her investment takes the following forms:

(A) $200,000 unregistered five-year Hi-Tech note bearing market rate interest. (B) $200,000 Hi-Tech registered bond bearing market rate interest. (C) $190,000 Hi-Tech registered bond bearing market rate interest and warrants to purchase Hi-Tech common stock at a favorable price. (D)$200,000 of Hi-Tech common stock. (E)$200,000 of Hi-Tech convertible preferred stock. (F)Same as (d), above, except that Thelma and Allen originally capitalized Hi-Tech by each contributing $500,000. (G)Same as (d), above, except that Jennifer plans to give the Hi-Tech common stock to her son, Peter, as a wedding gift. (H)Same as (d), above, except that Jennifer and her son, Peter, will purchase the Hi-Tech common stock through Leech Associates, a venture capital partnership.

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