Bryan operates his business as a C corporation. He is the only shareholder. The accumulated E & P is $800,000. Starting next year, he plans on distributing $200,000. In future years, he intends to distribute all of the annual earnings. Recognizing that the distribution would be taxed as dividend income, he has developed the following tax strategy.
• Sell the corporate assets to himself for the fair market value.
• Have the corporation invest the sales proceeds in a mutual fund.
• Contribute the assets to an LLC and operate his business in this legal form.
Evaluate Bryan’s proposal to avoid double taxation.