Question

Reign Corporation is a profitable manufacturing concern with $900,000 of? E&P. It is owned in equal shares by Edward and Peggy?,husband and wife. Both individuals are actively involved in the business. Consider the following independent? events:

Requirement

Determine the tax consequences of each independent event. ?(For events with no constructive dividend? and/or no effect on the? corporation, leave the amount box? empty; do not enter a? zero.)

a.	In reviewing a prior year tax return for Reign?,the IRS determines that the $420,000 of salary and bonuses paid to Peggy is unreasonable and that reasonable compensation is $110,000.
b.	Reign loaned Edward $500,000 over the past three years. None of the money has been repaid.Edward does not pay interest on the loans.
c.	Reign sells a building to Peggy for $80,000 in cash. The property has an adjusted basis of $100,000 and is subject to a $60,000 mortgage, which Peggy assumes. The FMV of the building is $200,000.
d.	Edward leases a warehouse to Reign for $50,000 per year. According to an IRS?auditor, similar warehouses can be leased for $30,000 per year.
e.	Peggy sells to Reign for $240,000 land on which Reign intends to build a factory. According to a recent? appraisal, the FMV of the land is $90,000.
f.	The corporation owns an airplane that it uses to fly executives to business meetings. When the airplane is not being used for? business,Edward and Peggy use it to travel to their ranch in Idaho for short vacations. The approximate cost of their trips to the ranch in the current year is $5,000.

Answer 1

a) $110,000 will be taxable in the hands of Peggy and remaining amount of $310,000 (420,000-110,000) will be taxable in the hands of her husband Edward under clubbing provisions of Income tax.

b) The loan will be carried in the balance under Loans and Advances upto he repays the Loan or the Reign waived the Loan.

c) Peggy has to pay Capital Gain tax as she gets the building which has a FMV of $200,000 for just $80,000.

d) Edward was charging more amount from Reign as rent on which he has to pay tax under the head Income from House Property.

e) Peggy has to pay Capital gain tax because she sold the building which FMV is $90,000 for $240,000 . She was more income from the Reign Corporation.

f) Reign has to charge Edward and Peggy an amount of $5,000 for using the Jet which belongs to Reign for their Personal used for their trips.