Applicable authority-general description of tax consequence

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Peony owns all of the Garden Corporation common stock with a basis of $400,000 and a value of $900,000. Her grandchildren own nonvoting preferred stock with a basis and value of $540,000 that pays a 6% annual dividend. Peony would like to transfer her ownership of Garden to her grandchildren but retain a guaranteed income from Garden. Peony is considering several of the options below and has asked your advice on which of the options would be the most tax effective method of making this transfer?

Option 1: Peony sells her common stock to her grandchildren. They pay for the stock on the installmentmethod over 20 years with a 6% interest on the unpaid balance.

Option 2: Garden redeems all of Peony's common stock and issues her a 20-year bond for $900,000 that pays 6% interest.

Option 3: Garden redeems Peony's common stock and issues her preferred stock with a 6% yearlydividend rate. Garden exchanges the grandchildren's preferred stock for common stock.

Option 4: Peony exchanges 60% of her common stock with her grandchildren for all of their preferred stock.The grandchildren then have control and Peony retains 40% of the common stock.

Provide your assessment of each of the strategies above including cites to applicable authority and a general description of the tax consequence.

Reference no: EM133258408

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