Question

Georgia, an individual, owns all of the stock of Malific Xenophobe Oil Distributing Corporation, which not only has not shown a profit, but has consistently lost money in every year since Georgia acquired the stock. Georgia also conducted an oil and gas equipment leasing business as a sole proprietor. Georgia’s largest drilling rig normally leases for $1,000 a day. Recently Malific Xenophobe used Georgia’s drilling rig for 60 days, and because Malific Xenophobe’s reserves and credit were insufficient to permit it both to pay its workers and pay Georgia $60,000, Georgia rented the drilling rig to Malific Xenophobe for the 60 days for $5,000.

What are the tax consequences to Georgia and Malific Xenophobe?

Answer 1

Tax consequences to Georgia and Malific Xenophobe

Explanation:

Regardless of Georgia's normal lease charges of $1000 per day, the agreed charges per customer will be the amount to deduct the taxable income of the client and the amount to be taxed to Georgia.If the drilling rig would have been leased to Malific for $1000 per day, the would have deducted drilling expences of $60000.

Since Malific was leased the drilling rid equipment for $5000 it will deduct the amount of $5000 from its taxable income as a lease expences of the equipment.

The income earned by Georgia of $5000 will be added to his taxable income and taxed at the normal marginal tax rates.