1. Peach Corporation would like to transfer excess cash to its sole shareholder, Danny, who is also an employee. Danny is in the 28% tax bracket, and Peach is in the 34% bracket. Because Danny's contribution to the business is substantial, Peach believes that a $50,000 bonus in the current year is reasonable compensation and should be deductible by the corporation. However, Peach is considering paying Danny a $50,000 dividend because the tax rate on dividends is lower than the tax rate on compensation. Is Peach correct in believing that a dividend is the better choice? Why or why not? If you would have been given the responsibility, how would you have handled this situation? Discuss. 

2. George Corporation redeems 100 shares of its stock from Jerry for $10,000. Jerry's basis in those shares is $8,000. Explain possible alternative tax treatments of Jerry's receiving the $10,000.

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1 Peach corporation was trying to evade the tax and as Danny was the sole shareholder as well as an ... View the full answer