High Technologies, Inc. is a small semiconductor company owned an 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 corporation'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 corporation's financial 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 economic and tax goals if, in the alternative, her investment takes the following forms.

(a) A $200,000 unregistered five-year Hi-Tech note bearing market rate interest?

(b) A $200,000 Hi-Tech registered bond learning market rate interest.i

(c) A $190,000 Hi-Tech registered bond bearing market rate interest and $10,000 for 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), except that Thelma and Allen originally capitalized Hi-Tech by each contributing $500,000.

(g) Same as (d), except that Jennifer plans to give the Hi-Tech common stock to her son, Peter, as a wedding gift.

(h) Same as (d), except that Jennifer and her son, Peter, will purchase the Hi-Tech common stock through Leech Associates, venture capital partnership.

Answer:

Tax Implications in case the company becomes worthless:

(a)   No tax implication

(b)   Tax deduction of $200,000

(c)    Tax deduction of $190,000

(d)   Tax deduction of $200,000

(e)   Tax deduction of $200,000

(f)     Tax deduction of $200,000

(g)   No tax implication

(h)   Tax deduction of $100,000

Step-by-step explanation

(a)         Jennifer will not be able to claim a loss on capital assets as the securities are not registered and her security with unregistered bonds will not be high

(b)         Jennifer will be able to claim a loss on capital assets in case the security becomes worthless but she will earn interest according to the prevailing market interest rate and won't earn a share of the actual profits from the company

(c)          Jennifer will be able to claim only loss of $190,000 & even if she able to claim $10,000 for purchase of share warrants, the shares warrants will only allow her to buy stocks after a specific period and majority of her investment will earn interest based on market conditions & not company's performance

(d)         Jennifer will be able to claim a loss on capital assets in case the investment becomes worthless and she will also have a right to share in the profits of the company either through dividends or capital gains

(e)         Jennifer will be able to claim loss in case of a negative situation but she will only receive profit at a fixed rate and won't be able to participate in equal profit-sharing in case of high profits

(f)          Jennifer will be able to claim a full loss on capital assets but if Thelma & Allen also more funds in the business, it will dilute the ownership of Jennifer & she will be receiving a smaller share of the profits

(g)         If Jennifer gives her son the securities then she will nether be able to claim tax benefits nor she will earn any income from the investment

(h)         If Jennifer buys stock through a venture capital partnership, the venture capital will claim the loss and Jennifer consequently has a share in the same and will also only have half of the share in the profits if the business starts earning profits.

Note: We are assuming that the company is publicly traded.

References:

https://www.lawyers.com/legal-info/taxation/income-tax/tax-deduction-for-worthless-securities.html

https://www.thetaxadviser.com/issues/2012/sep/clinic-story-07.html#:~:text=The%20general%20rule%20for%20deducting,asset%20in%20the%20taxpayer's%20hands.