Question

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00! & Palti umulated E & Pdf owners sely held company with accumulated 51. LO.8 Critical Thinking a. How is Iris Cupon b. What is Fresia Corporation's E & Panel 46. LO.2, 6 Parrot Corporation is a closely held com $300,000 and current E & P of $350.000 To owns a 50% share in Parrot, and they share management What are the tax consequences of each of the following i involving Parrot, Tom, and Jerry? How does each transaction a Parrot sells an office building (adjusted basis of $350.000. f. $300,000) to Tom for $275,000. nd Jerry are brothers, each nagement responsibilities equally lowing independent transactions ansaction affect Parrot's E&P 350.000; fair market value of owns tion o a. A charged on the loan (the current s for a specified rental rate. Tom Terry $250,000 on March 31 of this year. The loan is evide note and is payable on demand. No interest is charged on the applicable Federal interest rate is 3%). Parrot owns an airplane that it leases to others for a specified rent v also use the airplane for personal use and pay no rent. During the year. Tom used the airplane for 120 hours and Jerry used it for 160 hours The rental value of the airplane is $350 per hour, and its maintenance costs avem $80 per hour. 52. LO. ago. tax d. Tom leases equipment to Parrot for $20,000 per year. The same equipment can be leased from another company for $9,000 per year. I b.

Answer 1

(a) In this transaction there are two component, one is market price of office building is lower by $50,000 (the difference between carrying amount & fare market value i.e. $350,000-300,000) and second, it’s sold to Tom at $275,000 which is another loss to company by $25,000.

Hence in case of Parrot’s E&P reduced by 75,000 (50,000 disallowance loss & 25000 constructive dividend)

Tom’s tax liability will increase by deemed dividend of 25,000.

(b) The loan to Jerry doesn’t carry an interest but it has imputed interest of $5625 ($250,000 X 3% X 3/4 year).

It will be considered a deemed dividend equal to interest. Parrot’s E&P is increased by amount of interest income and reduced by the amount of deemed dividend payment.

In the hands of Jerry, interest amount will be deductible expenses only if it is taken for use of taxable income.

(c) Rental free uses of airplane create constructive dividend to shareholders. In present case, amount of constructive dividend to both Tom & Jerry equals the fair rental value of the airplane.

Constructive/Deemed dividend in hands of shareholders

Tom: 120 hours X 350 per hours rental rate = $42,000

Jerry: 160 hours X 350 per hours rental rate = 56,000

Parrot’s E&P will reduced by 98,000 assuming that maintenance cost is already reduced from E&P.

(d) The excess amount charged by Tom for lease equipment of $11,000 ($20,000-$9,000) from Parrot is considered as constructive dividend in hands of Tom and reduces the Parrot’s E&P.