Which of the Following Statements Regarding the Use of a Corporation

question 25

Multiple Choice

Which of the following statements regarding the use of a corporation as a tax shelter is false?

• A) In years in which the individual tax rates were significantly higher than the corporate rates, individuals could reduce the tax on business income by operating as a regular corporation rather than as a passthrough entity.
• B) The combination of deferral of individual tax and conversion of ordinary income into capital gain enhanced the attractiveness of corporations as tax shelters.
• C) When the top corporate and individual tax rates are equal, the opportunity for individuals to exploit differences between the individual and corporate rate structures is significant.
• D) When the top corporate and individual tax rates are equal, corporations are effective tax shelters only if business income is very small and the owners are willing to forgo dividends for a long period of time.

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Definitions:

Demand Function

A mathematical representation that describes the relationship between the quantity of a good demanded and its price, among other variables.

Inverse Demand Function

A representation of demand that expresses price as a function of quantity, rather than the conventional demand function which expresses quantity demanded as a function of price.

Price Elasticity

Measures the responsiveness of quantity demanded or supplied to a change in price.

Wealth

The abundance of valuable resources or valuable material possessions, including the total of all financial assets minus any liabilities.