Mr. Z is the sole shareholder of TZ. He also owns the office building that serves as corporate headquarters. Last year, TZ paid $180,000 annual rent to Mr. Z for the use of the building. TZ’s marginal tax rate was 34 percent and Mr. Z’s marginal tax rate was 35 percent. The revenue agent who audited TZ’s return concluded that the fair rental value of the office building was $125,000.
a) By what amount is Mr. Z’s tax liability reduced?
b) By what amount is corporation TZ’s tax increased?