7A.

Mango, an individual, has a marginal tax rate on ordinary income of 37 percent. He currently earns $700,000 per year of ordinary income through a business operated as a sole proprietorship. If Mango does not require current cash from the business, calculate the potential decrease in his annual tax liability if he incorporates and operates the business through a C corporation. Assume the corporate tax rate is 21%.

7B.

During a recent IRS audit, the revenue agent decided that Apple, an individual, used his closely-held corporation, Fruit Tree Inc., to avoid shareholder tax by accumulating earnings beyond the reasonable needs of the business. Fruit Tree Inc.'s taxable income for the year was $900,000 and it paid no dividends. Compute Fruit Tree Inc.'s accumulated earnings tax, assuming that it had accumulated $234,000 after-tax income in prior years. Also assume that the accumulated earnings tax rate is 20% and up to $250,000 can be accumulated without incurring the accumulated earnings tax.