American Corporation has two equal shareholders, Mr. Freedom and Brave Incorporated. In addition to their investments in American stock, both shareholders have made substantial loans to American. During the current year, American paid $160,000 interest each to Mr. Freedom and Brave Incorporated. Assume that American and Brave have 21 percent tax rates, and Mr. Freedom’s marginal tax rate on ordinary income is 37 percent. Recalculate Brave’s tax cost and after-tax earnings assuming its receipt of interest from American is treated as a constructive dividend. Recalculate Mr. Freedom’s tax cost and after-tax earnings assuming his receipt of interest from American is treated as a constructive dividend.
American Corporation has two equal shareholders, Mr. Freedom and Brave Incorporated. In addition to their investments in American stock, both shareholders have made substantial loans to American. During the current year, American paid $160,000 interest each to Mr. Freedom and Brave Incorporated. Assume that American and Brave have 21 percent tax rates, and Mr. Freedom’s marginal tax rate on ordinary income is 37 percent. Recalculate Brave’s tax cost and after-tax earnings assuming its receipt of interest from American is treated as a constructive dividend. Recalculate Mr. Freedom’s tax cost and after-tax earnings assuming his receipt of interest from American is treated as a constructive dividend.
SWFT Essntl Tax Individ/Bus Entities 2020
23rd Edition
ISBN:9780357391266
Author:Nellen
Publisher:Nellen
Chapter3: Taxes On The Financial Statements
Section: Chapter Questions
Problem 21P
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American Corporation has two equal shareholders, Mr. Freedom and Brave Incorporated. In addition to their investments in American stock, both shareholders have made substantial loans to American. During the current year, American paid $160,000 interest each to Mr. Freedom and Brave Incorporated. Assume that American and Brave have 21 percent tax rates, and Mr. Freedom’s marginal tax rate on ordinary income is 37 percent.
- Recalculate Brave’s tax cost and after-tax earnings assuming its receipt of interest from American is treated as a constructive dividend.
- Recalculate Mr. Freedom’s tax cost and after-tax earnings assuming his receipt of interest from American is treated as a constructive dividend.
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