Smartmoney, Inc

question 36

Essay

Smartmoney, Inc. was formed by three wealthy dentists to pool their investment funds. They each invested $200,000 in the corporation, which was immediately used to purchase stocks to be held as investments. The first year, the corporation received dividends of $70,000 and filed a tax return paying a corporation tax in the amount of $7,350 [($70,000 dividends - $35,000 DRD)× .21 = $7,350]. The IRS audits this corporation and sends a tax bill in the amount of $12,530 ($62,650 UPHCI × 0.20 = $12,530)plus underpayment penalty and interest. What is this additional tax and what should the dentists do about it? What action(s)do you recommend the corporation take for the tax year in question and subsequent tax years?

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Definitions:

Fair Value

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Title Conveyance

The legal process of transferring ownership of property from one party to another.

Journal Entry

A record in accounting that logs a transaction and its impact on financial statements, consisting of a debit and a credit.