Problem
A large corporation hires you as a consultant. The corporation has accumulated tax losses, and it expects to be in this position for a number of years. The corporation needs a new distribution facility on the West Coast to service its West Coast customers more efficiently. The facility has an estimated cost of $10 million.
The corporation is considering three alternative plans.
a) Under plan A, the corporation can borrow the $10 million and purchase the facility.
b) Under plan B, the corporation can issue common stock to raise the $10 million and purchase the facility.
c) Under plan C, the corporation can lease the facility from the current owners.
The corporation asks you to create a brief report outlining the tax consequences of each plan.
Your report should also contain your recommendation as to the most tax-efficient plan. Assume the corporation is not limited with respect to its interest deductions.