Mr. and Mrs. Tinker own a sizeable investment portfolio of stock in publicly held corporations. The couple has four childrenages 20, 22, 25, and 27with whom they want to share their wealth. Unfortunately, none of the children has demonstrated an ability to manage money. As a result, Mr. and Mrs. Tinker plan to transfer their portfolio to a new corporation in exchange for 20 shares of voting stock and 400 shares of nonvoting stock. They will give 100 nonvoting shares to each child. The couple will serve as the directors of the corporation, manage the investment portfolio, and distribute cash dividends when their children need money. They estimate that the portfolio will generate $72,000 annual dividend income.

1. If the Tinker Family Corporation is operated as an S corporation, compute the annual income tax burden on the dividend income generated by the investment portfolio. Assume that Mr. and Mrs. Tinker are in the 37 percent tax bracket and each child is in the 12 percent tax bracket. To simplify the case, ignore any value of the couples management service to the corporation.
2. Compute the tax burden for the first year if Tinker Family Corporation does not have an S election in effect and distributes a $100 annual dividend per share.