Eight Individuals Own Navy Corporation, a C Corporation

question 47

Essay

Eight individuals own Navy Corporation, a C corporation. Three shareholders make up the board of directors and own 51% of the stock. The corporation has a successful manufacturing business. It has accumulated $3 million of E&P and expects to accumulate another $200,000 of E&P annually. Annual dividend payments are $30,000. Demand for Navy's goods has been strong, but the company does not anticipate any expansion or repair of the current plant for three to five years. Management has invested $200,000 annually in growth stocks. Its current investment portfolio is $1.2 million. The portfolio is held as protection against a business slowdown. Loans to shareholder-employees currently are $400,000. As Navy's CPA, what tax issues should you have your client consider?

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Definitions:

Split-off Point

The stage in a production process where multiple products are generated from a common input and can further be processed or sold separately.

Joint Processing Costs

Expenses incurred during the processing of two or more products simultaneously before they are separable.

Cocktail of Organic Nutrients

A mixture or blend of organic substances intended to provide nutritional benefits.

Predetermined Overhead Rate

A rate calculated before a period begins, based on the estimated overhead costs and estimated level of activity, used to allocate overhead to products or services.