Nutt Corporation projects that it will have taxable income for the year of $400,000 before incurring any interest expense. Assume Nutt's tax rate is 35 percent.
Required:
(a) What is the amount of the double-tax on the $400,000 of pre-interest expense earnings if Hazel, Nutt's sole shareholder, lends Nutt Corporation $30,000 at the beginning of the year, Nutt pays Hazel $8,000 of interest on the loan (interest is considered to be reasonable), and Nutt distributes all of its after-tax earnings to Hazel? Assume her ordinary marginal rate is 35 percent and dividend tax rate is 15 percent.