Sarah and Rex formed SR Entity on December 28 of last year. The entity operates on a calendar tax year. Each individual contributed $800,000 cash in exchange for a 50% ownership interest in the entity (common stock if a corporation; partnership interest if a partnership). In addition, the entity borrowed $400,000 from the bank. The entity operates on a calendar year. On December 28 of last year, the entity used the $2 million cash (contributions and loan) to purchase assets as indicated in the following balance sheet as of December 28 of last year:

The balance sheet did not change between December 28 of last year and the beginning of the current year. Thus, the above balance sheet also represents the balance sheet at January 1 of the current year.
The following data apply to the entity for the current year:
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Sarah and Rex actively manage the entity€™s business, and the business does not qualify for the U.S. production activities deduction. At the individual level, Sarah and Rex are each single with no dependents. Each individual claims a standard deduction and one personal exemption (if applicable). Neither individual has income from sources other than listed above.
a. First, assume the entity is a regular C corporation and the distributions are dividends to Sarah and Rex. For the current year, determine the following:
1. The corporation€™s taxable income and tax liability.
2. Sarah€™s and Rex€™s individual AGI, taxable income, and tax liability.
3. The total tax liability for the corporation and its owners.
b. Next, assume the entity is a partnership. For the current year, determine the following:
1. Partnership ordinary income and each partner€™s share of partnership ordinary income.
2. Partnership separately stated items and each partner€™s share of each item.
3. Sarah€™s and Rex€™s AGI, taxable income, and total tax liability. Assume each partner will incur a $17,660 self-employment tax.
4. Each partner€™s basis in the partnership (outside basis) at the end of the current year.
c. Based on your analysis for the current year, which entity is better from an overall tax perspective? What are the shortcomings of examining only one year?
d. Given the corporate form, explain how the corporation can restructure the $50,000 distribution to each individual to reduce the overall tax liability. Assume the corporation and each individual pay a 7.65% payroll tax.

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Cash S 100,000 nventory Investment in tax-exempt bonds Investment in corporate stock (less than 20%-owned) 1,770,000 50,000 80.000 Total $2,000,0D0 Liability S 400,000 Equity 1600,000 Total $2,000,000 *lf a partnership, each partner's beginning capital account is S800.000. Sales Purchase of additional inventory Ending inventory at December 31 of the current year Gain on sale of corporate stock on December 31 of the current year Dividends received on stock prior to its sale Tax-exempt interest received Operating expenses Interest paid on loan (no principal paid) Distribution on December 31 of the current year: S3,000,000 2,100,000 1,650,000 20,000 4,000 500,000 30,000 Sarah 50,000 Rex 50,000