Nutt Corporation projects that it will have taxable income for the year of $400,000 before incurring any

Question:

Nutt Corporation projects that it will have taxable income for the year of $400,000 before incurring any interest expense. Assume Nutt's tax rate is 35 percent.

a. What is the amount of the overall tax (corporate level + shareholder level) on the $400,000 of pre-interest expense earnings if Hazel, Nutt's sole shareholder, lends Nutt Corporation $30,000 at the beginning of the year, Nutt pays Hazel $8,000 of interest on the loan (interest is considered to be reasonable), and Nutt distributes all of its after-tax earnings to Hazel (ignore the net investment income tax)? Assume her ordinary marginal rate is 35 percent and dividend tax rate is 15 percent.

b. Assume the same facts as in part a except that the IRS determines that the fair market value of the interest should be $6,000. What is the amount of the double-tax on Nutt Corporation's pre-interest expense earnings (ignore the net investment income tax)?

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