Mr. Lion, who is in the 39.6 percent tax bracket, is the sole shareholder of Toto, which manufactures greeting cards. Toto’s average annual net profit (before deduction of Mr. Lion’s salary) is $200,000. For each of the following cases, compute the income tax burden on this profit. (Ignore any payroll tax consequences.)
a. Mr. Lion’s salary is $100,000, and Toto pays no dividends.
b. Mr. Lion’s salary is $100,000, and Toto distributes its after-tax income as a dividend.
c. Toto is an S corporation. Mr. Lion’s salary is $100,000, and Toto makes no cash distributions. d. Toto is an S corporation. Mr. Lion draws no salary, and Toto makes no cash distributions.
e. Toto is an S corporation. Mr. Lion draws no salary, and Toto makes cash distributions of all its income to Mr. Lion.