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 of the following statements is incorrect?
A)$100,000 will be subject to double taxation.
B)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).
C)A preferential tax rate will apply to the dividend income of both Bob and Leo.
D)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.
E)None of the above.

Question

Quizplus · Accepted Answer

To the extent Bob's dividend income would otherwise be taxed at 10% or 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.

Penguin Corporation,a C Corporation,has Two Equal Shareholders,Bob and Leo