Final answer:
Two levels of taxation apply to corporate earnings distributed as nonqualified fringe benefits: the corporation pays taxes on profits, and the employee pays individual income tax on the received benefits.
Step-by-step explanation:
Corporate earnings paid out as nonqualified fringe benefits typically face two levels of taxation. The corporation first pays taxes on its profits at the corporate tax rate. When these earnings are distributed as fringe benefits, the recipient or employee is subjected to individual income tax on the value of these benefits.
These fringe benefits, which are not specifically exempt from taxation, lead to a situation known as double taxation. The corporation cannot deduct the expense of nonqualified fringe benefits, and the employee must include the fair market value of such benefits in their personal income subjecting them to personal income taxes. This generally differs from qualified benefits that are tax-advantaged.