Jennifer owns 60% of the stock in Heath Corporation. During the current year, Heath Corporation has taxable income of $80,000 and pays dividends of $30,000. Which of the following statements about Jennifer’s income from Heath Corporation is/are correct?I. If Heath Corporation is an S corporation, Jennifer must recognize $48,000 of income. II. If Heath Corporation is a corporation, Jennifer must recognize $18,000 of income. a. Only statement I is correct. b. Only statement II is correct. c. Both statements are correct. d. Neither statement is correct.

Option C Both statements are correct.

Explanation:

An S Corporation is not liable for taxes under US tax system, the taxable income of the company is included in the income of shareholders for the year. So if the company is S company then the share of taxable income attributable to Jennifer is 60% of the total Taxable Income which is $48,000 for the year. So the statement 1 is correct.

If the company is taxed under US tax system which means it is C Corporation, then its taxable income will not be included in the income of its shareholders because it would be double taxed for the year. The only income that will be included in the shareholder's income will be the dividends that the shareholder will receive. So the taxable income for the year would be $18000 which is the dividend income for the year. So the statement 2 is also correct.