During the current year, Walter invests $35,000 in each of two separate corporations. Each investment gives him a 20% ownership interest. Corporation X is a C corporation that has taxable income of $200,000 and pays dividends totaling $50,000. Corporation Z is an S corporation that has taxable income of $100,000 and pays $50,000 of dividends. As a result of these two investments, Walter
I.Has $10,000 of taxable income from Corporation X.
II.Has $10,000 of taxable income from Corporation Z.

Question

During the current year, Walter invests $35,000 in each of two separate corporations. Each investment gives him a 20% ownership interest. Corporation X is a C corporation that has taxable income of $200,000 and pays dividends totaling $50,000. Corporation Z is an S corporation that has taxable income of $100,000 and pays $50,000 of dividends. As a result of these two investments, Walter
I.Has $10,000 of taxable income from Corporation X.
II.Has $10,000 of taxable income from Corporation Z.
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Quizplus · Accepted Answer

Statement I is correct because Walter's 20% ownership in Corporation X, a C corporation, would not directly affect his personal taxable income from the corporation's earnings, except through dividends received. Since he receives $50,000 in dividends and owns 20% of the corporation, his taxable income from Corporation X would indeed be $10,000 (20% of $50,000). Statement II is incorrect because, for an S corporation like Corporation Z, the corporation's income passes through to the shareholders. Thus, Walter would have $20,000 of taxable income from Corporation Z (20% of $100,000), not $10,000, regardless of the dividends paid.

During the Current Year, Walter Invests $35,000 in Each of Two