McGraw-Hill's Taxation of Business Entities 3rd Edition by Connie Weaver, Brian Spilker, Edmund Outslay, John Robinson, Ronald Worsham, Benjamin Ayers, John Barrick

Exercise 64

Jabar Corporation, a taxable corporation, projects that it will have taxable income of $300,000 before incurring any lease expenses. Jabar's tax rate is 35 percent. Abdul, Jabar's sole shareholder, has a marginal tax rate of 35 percent on ordinary income and 15 percent on dividend income. Jabar always distributes all of its after-tax earnings to Abdul.
a. What is the amount of the double-tax on Jabar Corp.'s $300,000 pre-lease expense income if Jabar Corp. distributes all of its after-tax earnings to its sole shareholder Abdul
b. What is the amount of the double-tax on Jabar Corp.'s $300,000 pre-lease expense income if Jabar leases equipment from Abdul at a cost of $30,000 for the year
c. What is the amount of double-tax on Jabar Corp.'s $300,000 pre-lease expense income if Jabar Corp. leases equipment from Abdul at a cost of $30,000 for the year but the IRS determines that the fair market value of the lease payments is $25,000