The Capital-Ideas Company is in its development stage and is deciding how to formally organize its business venture. The founder, Rolf Lee, is considering organizing as either a proprietorship or a corporation. He expects revenues to be $2 million next year with total expenses amounting to $1.625 million, resulting in a taxable income of $375,000. Rolf is interested in estimating his federal income tax liability based on the schedules contained in Figure.

A. Calculate the amount of federal income tax that Rolf would pay if Capital-Ideas is organized as a proprietorship. What would be the marginal tax rate on the last dollar of taxable income and what would be the average tax rate?

B. Calculate the amount of federal income tax that the Capital-Ideas Company would have to pay if the venture is organized as a regular corporation. What would be the marginal tax rate on the last dollar of taxable income and what would be the average tax rate?

C. If the Capital-Ideas Company is organized as a corporation and all after-tax profits are paid out as dividends to Rolf Lee, what additional personal income taxes would be paid? What would be the marginal tax rate and the average tax rate on this personal income received from the corporation?

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2009 PERSONAL AND CORPORATE FEDERAL INCOME TAX RATES CORPORATE MARGINAL INCOME TAX RATES TAXABLE INCOME OVER- BUT NOT OVER- MARGINAL TAX RATE 50,000 15% 75,000 50,000 25% 75,000 100,000 34% 39% 100,000 335,000 335,000 10,000,000 34% 10,000,000 15,000,000 35% 18,333,333 15,000,000 38% 18,333,333 35% PERSONAL MARGINAL INCOME TAX RATES SINGLE MARRIED FILING JOINTLY TAXABLE INCOME TAXABLE INCOME BUT NOT MARGINAL MARGINAL TAX RATE OVER- OVER- OVER- BUT NOT OVER- TAX RATE 16,700 8,350 10% 10% 8,350 33,950 15% 16,700 67,900 15% 82,250 33,950 25% 67,900 137,050 25% 82,250 171,550 28% 137,050 208,850 28% 171,550 372,950 33% 208,850 372,950 33% 372,950 35% 372,950 35% Source: Intemal Revenue Service, http://www.IRS.gov.