Mr. Pauper and Mrs. Queen are the equal shareholders in Corporation PQ. Both shareholders have a 39.6 percent marginal tax rate. PQ’s financial records show the following:
Gross income from sales of goods …………… $880,000
Operating expenses …………………………… (410,000)
Interest paid on debt to Mr. P and Mrs. Q ……. (62,000)
Dividend distributions: Mr. Pauper ………….. (50,000)
Mrs. Queen …………………………………….. (50,000)
a. Compute the combined tax cost for PQ, Mr. Pauper, and Mrs. Queen.
b. How would your computation change if the interest on the shareholder debt was $162,000 and PQ paid no dividends?