Flycatcher Corporation,a C corporation,has two equal individual shareholders,Nancy and Pasqual.In the current year,Flycatcher earned $200,000 net profit and paid a dividend of $40,000 to each shareholder.Regardless of any tax consequences resulting from their interests in Flycatcher,Nancy is in the 28% marginal tax bracket and Pasqual is in the 35% marginal tax bracket.With respect to the current year,which of the following statements is incorrect?
A)Flycatcher pays corporate tax on $200,000.
B)Nancy incurs income tax of $6,000 on her dividend income.
C)Pasqual incurs income tax of $6,000 on his dividend income.
D)Flycatcher can avoid the corporate tax altogether by paying out all $200,000 of net profit as dividends to the shareholders.
E)None of the above.

Question

Quizplus · Accepted Answer

Flycatcher pays corporate tax on $200,000 (A) and Nancy incurs income tax of $6,000 on her dividend income (B) because she is in the 28% tax bracket. Pasqual incurs income tax of $14,000 on his dividend income (C) because he is in the 35% tax bracket. Option D is incorrect because Flycatcher cannot avoid corporate tax altogether by paying out all of the net profit as dividends. The corporation has an independent tax liability, which needs to be accounted for separately from the individual tax liabilities of the shareholders.

Flycatcher Corporation,a C Corporation,has Two Equal Individual Shareholders,Nancy and Pasqual