Calculate the amount of the initial tax

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Problem - Otis is the CEO of Rectify, Inc., a private foundation. Otis invests $500,000 (80%) of the foundation's investment portfolio in high-risk derivatives. Previously, the $500,000 had been invested in corporate bonds with an AA rating that earned 4% per annum. If the derivatives investment works as Otis's investment adviser claims, the annual earnings could be as high as 20%.

Required -

a. Determine whether Rectify is subject to any of the taxes imposed on private foundations.

b. If so, calculate the amount of the initial tax.

c. If so, calculate the amount of the additional tax if the act causing the imposition of the tax is not addressed within the correction period.

d. Are Otis and the foundation better off financially if the prohibited transaction, if any, is addressed within the correction period? Explain.

Reference no: EM132663658

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