Answer the following statements true (T) or false (F)

Question

1. The Current Model most closely describes a pass-through entity while a variation of the Deferred Model describes a C corporation.
2. The Pass-Through Model applies to a sole proprietorship.
3. The C Corporation Model is a variation of the Pass-Through Model, where taxation occurs at both the entity and the owner levels.
4. Given a choice between a fully-taxable investment and a tax-favored investment, investors will prefer the tax-favored investment, assuming the two investments are equally risky.
5. While tax-exempt bonds are not subject to income tax under the Internal Revenue Code, they are subject to implicit taxes caused by increased demand driving up the price.

Answer 1

1. TRUE
Owners of pass-through entities pay taxes each year on the entities' earnings. Owners of C corporations defer taxes until dividends are received.
2. TRUE
The sole proprietor pays taxes each year on the business's earnings.
3. FALSE
The C Corporation Model is a variation of the Deferred Model, where taxation occurs at both the entity and the owner levels.
4. TRUE
It is correct that investors prefer tax-favored investments which in turn drives up the price of the tax-favored investment due to demand forces.
5. TRUE
The tax-favored status does increase demand, driving up the cost of tax-exempt bonds.