Week 1 1. Question : (TCO 2) Penguin Corporation, a C corporation, has two equal shareholders, Bob and Leo. Penguin earned $100,000 net profit during its first year of operations and paid a dividend of $50,000 to each shareholder. Before considering the dividend, Bob is in the 10% marginal tax bracket and Leo is in the 28% marginal tax bracket. Which statement is incorrect?

Student Answer: $100,000 will be subject to double taxation.

Penguin could have avoided paying corporate tax if, instead of paying a dividend, it had paid Bob and Leo a salary of $50,000 each (assuming a $50,000 salary for each is reasonable). A preferential tax rate will apply to the dividend income of both Bob and Leo. If Penguin had paid Bob and Leo a salary of $50,000 each, Bob would have paid less federal income tax on his salary than Leo would have paid on his salary. None of the above

Instructor Explanation: See Chapter 2. To the extent Bob's dividend income would otherwise be taxed at 105 and 15%, the preferential rate on his dividend is 0%. Thus, Bob will not pay tax on some of his dividend income, and to that extent not all $100,000 is subject to double taxation.

Points Received: 2 of 2 Comments:

Question 2. Question : (TCO 2) Sage Inc., a closely held corporation that is not a PSC, has a $110,000 passive loss, $90,000 of active income, and $25,000 of portfolio income during the year. How much of the passive loss can Sage deduct in the current year?

Student Answer: $0

$25,000

$90,000

$110,000

None of the above

Instructor Explanation: See Chapter 2. As a closely held corporation, Sage may offset $90,000 of the $110,000 passive loss against the $90,000 of active income but may not offset the remaining $20,000 against portfolio income.

Points Received: 2 of 2 Comments: