Solved: MGT 240B - UC IC-DISC TAX STRATEGY

1) IC-DISC TAX STRATEGY
Assume BLASTCO is an S corporation that has $100 million in qualifying export sales and $25 million in net export income on those sales. BLASTCO is considering the establishment of an IC-DISC subsidiary. The IC-DISC will distribute the entire commission income as a dividend to its sole shareholder, JoJo Mac, who is an individual.
JoJo’s Individual Federal Income Tax Rates:
Ordinary Income = 40%
Dividend = 20%
Surtax On Investment Income = 4%
a) Compute the maximum amount of commission that can be paid to the IC-DISC
b) Compute the federal income tax savings obtained from the commission payment
c) Compute the federal income tax on the dividend paid to BLASTCO
d) Compute the net federal income tax benefit of the IC-DISC

2) SMALL CAPTIVE INSURANCE COMPANY TAX STRATEGY
Assume the following facts to compute the federal income tax benefit/savings of utilizing a small captive insurance company.

• TECHNO is an S-Corporation owned 100% by one individual (James Marcon)
  -Individual Federal Income Tax Rates: Ordinary = 40% and Capital Gain = 20%
  -Surtax on Investment income = 4%
  -The maximum annual insurance premium paid to a small captive is $1.2m
• Premiums paid in 2015 would not be distributed by the captive insurance company until 2020.
  -Annual Cost to maintain a small captive insurance company = $30,000
  TECHNO is considering setting up a small captive insurance company to insure risks not currently insurable by available insurance agencies. TECHNO would make the maximum insurance premium payment allowable for 2015.
  a) Compute the federal income tax reduction in 2015 by TECHNO paying the maximum premium amount of $1.2m.
  b) Compute the federal income tax related to the distribution of $1.2m in 2020.
  c) Compute the net federal income tax benefit of having the captive insurance company
  d) Based upon the annual cost of maintaining a captive company and your computations in a) and b) above, would you recommend the creation of a small captive insurance company by TECHNO?
  e) List 3 other factors that should be considered by TECHNO before creating a small captive insurance company.

3) ALTERNATIVE MINIMUM TAX (AMT) & INCENTIVE STOCK OPTION (ISO)
Complete the questions listed below relating to TECHSAAS Corp for its employee, Britka Lee, for regular and AMT federal income tax purposes. For each date, indicate if this is a taxable event, amount of taxable income, tax basis, and character of the income.
Also indicate the starting date for the holding period of the underlying stock. TECHSAAS issued Incentive Stock Options (ISO) to Britka as follows:
a) July 1, 2013 - Granted 50,000 ISO’s (Exercise price = $1/share & FMV
=$1/share).
b) June 15, 2014 – Exercised her 50,000 ISO’s (FMV of stock = $6/share)
c) October 20, 2015 – Sold 50,000 shares of stock (Proceeds = $31/share)
4) QUESTIONS FROM SELECTED READINGS
a) What does FATCA stand for?
b) Briefly explain what FATCA requires.
c) List 3 facts about FATCA
d) List the two main facts needed to by a company to benefit from an IC-DISC
e) Briefly explain AMT for individuals, including purpose and impact on taxpayers.
f) List two additional benefits of a small captive insurance company other than income tax benefits.