Reference no: EM132568094

Question - Larry and Katy are the equal shareholders in LK Corporation. Both shareholders have a 37 percent marginal tax rate on ordinary income. LK's financial records show the following:

Gross income from sales $875,000

Operating expenses (420,000 )

Interest paid on debt to shareholders (75,000)

Dividend distributions: Larry (50,000)

Katy (50,000)

Requirements - Determine the following:

(1) The tax cost for LK.

(2) The tax cost for the shareholders Larry & Katy combined.

(3) Assuming that the interest on the shareholder debt was $175,000 and LK paid no dividends, the combined tax cost of all three, LK, Larry, and Katy.