Case (b): But Jack will now be bound to accept the terms and conditions being set by MPC but this aspect goes beyond the scope of topic under discussion as the focus here is just on income tax consequences of the deal.
For the case of MPC there would be a marginal tax benefit for the company as it has incurred an expense of $100,000 but later on if this deal remains successful and generate additional profits for MPC, then those profits will surely be subject to income tax considerations for the remaining all of the 20 years of deal period. For now there is no such additional amount to be paid as income tax by MPC as it is an expense that will reduce the EBIT (earnings before interest and tax) of MPC.
Case (c): Fred Brown is involved in making agreements with MPC from years and this is going to be his fifth agreement with MPC. MPC in order to be tied with Fred Brown is paying him as $10,000 as Fred is enjoying a controlling power in the industry. He is in a position to join with other suppliers of the region to eliminate the risk of competition from new entrants. The suppliers are trying tom enjoy the monopoly powers in the region by joining hands against new entrants. The payment of $10,000 is subject to income tax considerations as this payment is a monetary benefit that Fred Brown is getting as a result of agreement being made by him with MPC. However Fred Brown and other five service station owners in the region of Chatswood Shire are filing an application in the Chatswood Shire Council to eliminate the risk of competition. These deals are just made to avoid entry of new firms as it can decrease profits of existing firms (Richardson & Lanis, 2007). For that purpose these five members are incurring legal expenses of $50,000 in participating in a joint legal action with the other 5 service station owners in Chatswood to successfully object to the application. The amount $50,000 being paid by these five service station owners is not subject to income tax consideration as it is a legal expense which does not comes under income tax obligations as per the statements of Section 91(2). Such a transaction of legal basis does not require the parties involved in an agreement or transaction to pay income tax (Feldstein, 2009). So there will be no income tax consequence of this deal between Chatswood Shire Council and five proprietors.