The Revenue Agent Who Audited the Form 1120 Filed by LCW

question 80

Multiple Choice

The revenue agent who audited the Form 1120 filed by LCW Inc. recharacterized $125,000 of the salary paid to Ms. Lewis (LCW's president and controlling shareholder) as a constructive dividend. LCW's marginal tax rate is 21%, and Ms. Lewis' marginal tax rate is 32%. Which of the following is not a consequence of the recharacterization?

• A) LCW's taxable income will increase.
• B) Ms. Lewis' taxable income will increase.
• C) Ms. Lewis' payroll tax liability will decrease.
• D) Ms. Lewis' income tax liability will decrease.

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Definitions:

Stock Selection Return

The return generated from choosing specific stocks to outperform the market or a segment of the market.

Benchmark

A standard or point of reference against which the performance of a security, investment portfolio, or asset manager can be measured.

EAFE

An acronym for Europe, Australasia, and Far East, often used in reference to a stock index that represents major foreign markets.

Interest Rate Parity Theory

This theory suggests that the difference between the exchange rates of two currencies is equal to the ratio of the interest rates between those two countries, thereby preventing arbitrage opportunities.