A Taxpayer Had the Following for the Current Year IIf the Taxpayer Is a Closely Held Corporation,taxable Income from \text

question 11

Multiple Choice

A taxpayer had the following for the current year:
$\begin{array}{c}\begin{array}{lll}& \text { Active}\\&\underline { \text { Income }}\\\text { Income } &\$ 75,000 \\\text { Deductions } &\underline{(45,000) }\\\text { Income(Loss) } &{\$ 30,000}\end{array}\begin{array}{lll} \text { Portfolio}\\\underline { \text { Income }}\\\$ 22,000 \\\underline {(16,000) }\\{\$ 6,000}\end{array}\begin{array}{lll} \text { Passive}\\\underline { \text { Income }}\\\$ 55,000 \\\underline {(110,000) }\\{\$(55,000) }\end{array}\end{array}$
I.If the taxpayer is a closely held corporation,taxable income from the three activities is income of $6,000.
II.If the taxpayer is an individual and the passive income is not related to a rental real estate activity,taxable income is $36,000.

• A)Only statement I is correct.
• B)Only statement II is correct.
• C)Both statements are correct.
• D)Neither statement is correct.

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Definitions:

Dividend Irrelevance

Dividend irrelevance theory suggests that the dividend policy a company follows has no effect on the company’s stock price or its cost of capital.

Transaction Costs

Expenses incurred when buying or selling goods and services, which can include commissions, fees, the spread between buy/sell prices, and other related costs.

Floatation Costs

The total costs associated with a company issuing new stocks or bonds, including underwriting, legal, registration, and other expenses.

Dividend Irrelevance Theory

A theory proposed by Modigliani and Miller that suggests dividend policies do not affect a company’s capital structure or stock price in a perfect market.