Tax Research Paper

1237 Words Feb 6th, 2013 5 Pages
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
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§265(a)(2), however, they did allow the taxpayers to take advantage of the double tax benefit to a certain extent. Each of the above taxpayers each already owned an insubstantial amount of debt and tax-exempt securities but it was only until the taxpayers began to increase/expand their amount of tax-exempt investments into a substantial category that the Court’s found I.R.C. §265(a)(2) to be applicable. The reason the Court’s do not enforce this code on insubstantial amounts is because if the IRS forced each taxpayer to sell the tax-exempt securities in order to be compliant with the code than they would induce a loss consequently causing each taxpayer not to pay any income taxes at all. As it is, your current tax exempt investments are not considered a substantial amount, but by purchasing the amount of municipal bonds suggested by Mr. Broker will move your portfolio into the substantial threshold causing I.R.C. §265(a)(2) to come into effect. Although taking advantage of both the interest deductions from the second mortgage and the tax exemptions of the newly purchased municipal bonds may seem ideal, it has been disallowed by Courts under I.R.C. §265(a)(2). But there are other exclusions to this code that in certain circumstances the Courts will allow the taxpayer to take advantage of the double tax benefit. I.R.C. 265(a)(2) becomes effective when “direct evidence of the proceeds of indebtedness are used for, and are traceable to,

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