Boots, Inc. is a "C" corporation engaged in the shoe manufacturing business. It also holds a small portfolio of securities.

Boots, Inc. is a "C" corporation engaged in the shoe manufacturing business. It also holds a small portfolio of securities. Boots is a calendar year, accrual method taxpayer with two equal shareholders, Emil and Betty, who are unrelated cash method taxpayers. Use the rates in Code Section 11 to determine Boots, Inc.'s tax liability, and assume for convenience that Emil and Betty each are taxable at a combined federal and state flat rate of 40% on ordinary income and a combined 20% on qualified dividends and long-term capital gains. During the current year, Boots has the following income and expense items and makes no distributions to its shareholders:

Income:

     Gross profit - sale of inventory                                                 $2,600,000

     Capital gains                                                                                     200,000

     Municipal bond interest (not private activity bond)                         10,000

Expenses and Losses:

     Operating expenses (includes Section 199 deduction)              800,000

     ACRS depreciation (5-year property, $4,000,000 cost,

          all placed in service in current year)                                         800,000

     Capital losses                                                                                   200,000

A) Determine Boots, Inc.'s taxable income and it's regular tax liability for the current year.

B) What result in (A) above, if Boots distributes $330,000 each to Emil and Betty as qualified dividends?

C)What result in (A) above, if instead of paying dividends Boots pays Emil and Betty salaries of $500,000 each? What other strategies could Emil and Betty employ to reduce the impact of the corporate "double tax"? In general, what are the risks of these strategies?

Relevant Sections: 79, 105(a), 105(b), 106, 119, 162(a)(3), 163, 267, 1363(a), 1366(a)(1), 1366(c)