Question

ang Firm Mand N. are related parties. For the past several years. Frm M's Marginal tax rate has been 30% and Firm N's marginal marginal tax rale has been 21%, firm M is evaluating a transaction that will generate $ 10.000 income in each of the next three years Irm M could restruchere the transachons so that the income would be earned by firm N. Because of the restruchunng, the annual income would decrease to $9.000. Should form M restructure the transaction? of them come wonie met het them on the begining of At the end any his ar into one for $ 2.800 is marginurn on At the begining of the year, Mr h put $50,000 cash Into investmentx. At the end of the year, he received a check for 8 2.800 representing his annual return on the investment. Mr. Los marginal tax rate on ordinary income N 37lo. However, his return on investment & is a capital gain taxed at 20%. compute the value of the preferennal rate to Mr. h.

Answer 1

Ans - 8 initially firm M had $10,000 income. But = after restructuring firm M will have $9000 income and firm N will have $1000 income. Tax rate on M is 30% and on Nis 214. so it restructuring is done tax paid on $1000 will be paid wood $210 instead of $300. Hence, restructuring must be done.