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 can avoid the corporate tax altogether by paying out all $200,000 of net profit as dividends to the shareholders.
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 pays corporate tax on $200,000.
E) None of the above.

Question

Quizplus · Accepted Answer

Choice A is incorrect because even if Flycatcher pays out all $200,000 of net profit as dividends to the shareholders, it will still have to pay corporate tax on the $200,000. Therefore, all the other statements are correct. Nancy will incur income tax of $6,000 (28% of $40,000) on her dividend income, and Pasqual will incur income tax of $14,000 (35% of $40,000) on his dividend income. Flycatcher will also pay corporate tax on the net profit of $200,000, which is currently taxed at a rate of 21% for C corporations.

Flycatcher Corporation, a C Corporation, Has Two Equal Individual Shareholders