Jamal Corporation,a C Corporation,projects That It Will Have Taxable Income

question 13

Essay

Jamal Corporation,a C corporation,projects that it will have taxable income of $500,000 before incurring any lease expenses.Jamal's tax rate is 34 percent.Ali,Jamal's sole shareholder,has a marginal tax rate of 33 percent on ordinary income and 15 percent on dividend income.Jamal always distributes all of its after-tax earnings to Ali.
a.What is the amount of the combined corporate and shareholder level tax on Jamal Corp.'s $500,000 pre-lease expense income if Jamal Corp.distributes all of its after-tax earnings to its sole shareholder Ali (ignore the 3.8% net investment income tax)?
b.What is the amount of the combined corporate and shareholder level tax on Jamal Corp.'s $500,000 pre-lease expense income if Jamal leases equipment from Ali at a cost of $120,000 for the year (ignore the 3.8% net investment income tax)?
c.What is the amount of the combined corporate and shareholder level tax on Jamal Corp.'s $500,000 pre-lease expense income if Jamal Corp.leases equipment from Ali at a cost of $120,000 for the year but the IRS determines that the fair market value of the lease payments is $80,000 (ignore the 3.8% net investment income tax)?

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Definitions:

Dividend Per Share

The sum of money paid by a company to its shareholders, divided by the total number of shares outstanding, usually expressed as a dollar amount per share.

Preferred Stock

A class of ownership in a corporation that has a higher claim on assets and earnings than common stock, usually with no voting rights but with a fixed dividend.

Common Stock

Represents equity ownership in a corporation, giving holders voting rights and a share in the company's profits through dividends.

Dividend Per Share

The portion of a company's earnings allocated to each outstanding share of common stock.