"Preferred Stock Bailouts and Personal Holding Company" Please respond to the following:
From your analysis of Section 306 in the e-Activity, differentiate between the tax treatment of earnings and profit on the distributing corporation of both a sale of Section 306 stock and redemption of Section 306 stock. Suggest the most important reasons for this differentiation in tax treatment.
Per the text, the personal holding company (PHC) tax penalizes taxpayers who enter into tax-motivated transactions designed to shelter passive income of closely held corporations from higher individual tax rates. Suppose you represent a professional athlete who is the majority owner of a corporation. The corporation has several personal service contracts with advertising agencies and endorsements for your client in addition to passive income.
Propose a plan in which you eliminate the potential for the PHC tax on the client's corporation.