You are the CPA who prepares the tax returns for Dudley, his wife Margo, and their two corporations. Dave owns 100% of Duright Corporation's stock. Duright's current-year taxable income is $100,000. Margo owns 100% of Northwest Corporation's stock. Northwest's current-year taxable income is $150,000. Dudley and Margo file a joint federal income tax return. What issues should be considered with
respect to the calculation of the three tax return liabilities?
What will be an ideal response?
• What is the tax liability for Duright Corporation? For Northwest Corporation?
• Are Duright and Northwest Corporations C corporations? S corporations?
• Are Duright and Northwest Corporations members of a controlled group?
• Are Margo and Dudley related parties for purposes of the controlled group stock ownership tests?
• What effect does being a member of the controlled group have on the reduced tax rate benefits of each corporation?
• Are Duright and Northwest Corporations personal service corporations?
• What amounts (if any) are Duright and Northwest Corporations paying to Dudley and Margo?
• Have the taxpayers divided up the payments among the three entities (Duright, Northwest, and the joint return) to minimize their tax liabilities?
• Can the taxpayers adjust their salaries and/or fringe benefits to reduce their total tax costs?
• If Duright and/or Northwest Corporations are C corporations, would an S election be advisable?
The primary issue is the appropriate corporation classification for Duright and Northwest Corporations. If both corporations are C corporations, they constitute a controlled group and must share the tax benefits of the reduced 15, 25%, and 34% tax brackets. Two other important issues are: (1) can either one of the corporations benefit from an S election? and (2) what amount of salaries and fringe benefits should be withdrawn from each of the two corporations to maximize the corporate and shareholder benefits? The last two points are too complicated to arrive at a definitive answer with the limited facts given here.
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