Question

Omar, an individual in the 37% tax bracket, wants to shift some of his income to a new corporation in order to take advantage of the 21% corporate tax rate. Omar plans to avoid any tax on dividends by retaining all earnings within the corporation. Will Omar's plan work?

Answer 1

Answer:

Omar's plan of retaining earnings can work depending on the liquidity preference of the shareholders.

If the shareholders have interest in short-term liquidity benefit (i.e. dividend), then his plans might be frustrated and vice versa.