Parrot Corporation is a closely held company with accumulated E & P of $300,000 and current E & P of $350,000. Tom and Jerry are brothers; each owns a 50% share in Parrot, and they share management responsibilities equally. What are the tax consequences of each of the following independent transactions involving Parrot, Tom, and Jerry? How does each transaction affect Parrot’s E & P?
a. Parrot sells an office building (adjusted basis of $350,000; fair market value of $300,000) to Tom for $275,000.
b. Parrot lends Jerry $250,000 on March 31 of this year. The loan is evidenced by a note that is payable on demand. No interest is charged on the loan (the current applicable Federal interest rate is 7%).
c. Parrot owns an airplane that it leases to others for a specified rental rate. Tom and Jerry also use the airplane for personal use and pay no rent. During the year, Tom used the airplane for 120 hours, and Jerry used it for 160 hours. The rental value of the airplane is $350 per hour, and its maintenance costs average $80 per hour.
d. Tom leases equipment to Parrot for $20,000 per year. The same equipment can be leased from another company for $9,000 per year.