Royal Corporation is a profitable manufacturing concern with $850,000 of E&P. It is owned in equal shares by Gary and Helen, husband and wife. Both individuals are actively involved in the business. Consider the following independent events:

Determine the tax consequences of each independent event using the format below:.

Effect on Owner

Effect on Corporation

Constructive Dividend (option below)

Amount of Dividend

Effect on Corporation (option below)

Amount

A. Yes

A. Increase Basis To

B. No

B. Increase Expense By

C. Reduce Basis To

D. Reduce Expense By

E. Recognize Total Gain Of

F. No Effect

A. In reviewing a prior year tax return for Royal, the IRS determines that the $640,000 of salary and bonuses paid to Helen is unreasonable and that reasonable compensation is $240,000

B. Royal loaned Gary $420,000 of the past three years. None of that money has been repaid. Gary does not pay interest on the loans.

c. Royal sells a building to Helen for $80,000 cash. The property has an adjusted basis of $110,000 and is subject to a $60,000 mortgage, which Helen assumes. The FMV of the building is $200,000.

D. Gary leases a warehouse to Royal for $68,000 per year. According to an IRS auditor, similar warehouses can be leased for $40,000 per year.

e. Helen sells to Royal for $450,000 land on which Royal intends to build a factory. According to a recent appraisal, the FMV of the land is $220,000.

F. The corporation owns an airplane that it uses to fly executives to business meetings. When the airplane is not being used for business, Gary and Helen use it to travel to their ranch in Idaho for short vacations. The approximate cost of their trips to the ranch in the current year is $13,000.