Mr. Vernon is the sole shareholder of Teva. He also owns the office building that serves as corporate headquarters. Last year, Teva paid $180,000 annual rent to Mr. Vernon for use of the building. Tevas marginal tax rate was 21 percent, and Mr. Vernons marginal tax rate was 37 percent. The revenue agent who audited Tevas return concluded that the fair rental value of the office building was $125,000.

Required:

1. Calculate any increase or decrease in Mr. Vernons tax as a result of the agents conclusion. The tax rate on dividend is 20 percent.
2. Calculate any increase or decrease in Tevas tax as a result of the agents conclusion.