For the Current Year,Birch Corporation,a C Corporation,reports Taxable Income of $400,000

question 49

Essay

For the current year,Birch Corporation,a C corporation,reports taxable income of $400,000 before paying salary to its sole shareholder Elaine.Elaine's marginal tax rate on ordinary income is 33 percent and 15 percent on dividend income.If Birch pays Elaine a salary of $200,000 but the IRS determines that Elaine's salary in excess of $100,000 is unreasonable compensation,what is the overall income tax rate on Birch's $400,000 pre-salary income? Assume Birch's tax rate is 35 percent and it always distributes all after-tax earnings to Elaine.

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Definitions:

Incremental Theorists

Individuals who believe that personal attributes and abilities can be developed or improved through effort and perseverance.

Delaying Gratification

The capacity to withstand the allure of an instant gratification in favor of receiving a reward at a later time.

Temporal Discounting

The tendency to devalue rewards and consequences that happen in the future in favor of immediate gratifications.

Learned Helplessness

A condition in which a person suffers from a sense of powerlessness, arising from a traumatic event or persistent failure to succeed.