Question

Problem 19-50 (LO. 8) Julio Inc. is a shareholder of Gray Corporation and is subject to a 21% tax rate. It acquired 2,000 shares of stock in Gray Corporation seven years ago at a cost of $50 per share. In the current year, Julio, Inc. received a payment of $150,000 from Gray Corporation in exchange for 1,000 of its shares in Gray. Gray has E & P of $1,000,000. Assume that Julio Inc. has no capital losses. If the stock ownership in Gray Corporation represented a 25% interest, what income tax liability would Julio incur on the $150,000 payment in each of the following situations? Click here to access the Dividends Received Deduction Exhibit. a. If the payment qualifies for stock redemption sale or exchange treatment, the tax liability for a corporate shareholder would be 21,000 b. If the payment does not qualify for stock redemption sale or exchange treatment, the tax liability for a corporate shareholder would be $ 6,300 Problem 19-48 (Algorithmic) (L0. 4) Kristen, the president and sole shareholder of Egret Corporation, has earned a salary bonus of $173,500 for the current year. Because of the lower tax rates on qualifying dividends, Kristen is considering substituting a dividend for the bonus. Assume that the tax rates are 24% for Kristen and 21% for Egret Corporation. Round your answers to nearest dollar, if required. a. How much better off would Kristen be if she were paid a dividend rather than salary? If Kristen were paid a bonus, she would receive $ after taxes. If Kristen receives a dividend rather than salary, 131,860 after taxes. Thus, she would be better off by receiving the dividend she would receive $ 147,475 b. How much better off would Egret Corporation be if it paid Kristen a salary rather than a dividend? and the net after-tax cost for the dividend The net after-tax cost of the bonus for Egret Corporation would be $ 137,065 147,475 . Therefore, Egret would be better off by $ would be $ if it paid the bonus v 5,205 c. Assume Egret Corporation paid Kristen a salary bonus of $225,550 instead of a $173,500 dividend. If Egret Corporation were to pay Kristen a salary bonus of $225,550 instead of a $173,500 dividend, Kristen would receive after taxes. The bonus would cost Egret Corporation $ 178,185 after taxes. 171,418 d. What should Kristen do? Both Egret Corporation and Kristen are better off with the $225,550 bonus

Answer 1

Solution and explanation:

Problem 19-50.

b.

The redemption does not qualify for sale or exchange treatment:

If the redemption distribution does not qualify for sale or exchange treatment, the entire $150,000 will be taxed as a dividend at 15%

$=\ 150,000 \times 15 \%$= $22,500  

Problem 19-48.

B. Egret corporation will be able to claim a deduction for the amount of bonus (as an expense) which will reduce the company's tax liability. The total amount of tax savings from bonus payment would be $36,435 $(\ 173,500-(\ 173,500 * 21 \%))$

So, the net after-tax cost of the bonus for Egret Corporation would be $137,065 $(\ 173,500-(\ 173,500 * 21 \%))$

However, Egret corporation is not entitled to claim a deduction for dividends paid and as such there will be no tax savings

So, the net after-tax cost for the dividend would be $173,500.

Egret corporation would be best off by $36,435 if it paid salary to Kristen