Final answer:
Option 3, paying dividends, is not an effective strategy for mitigating double taxation in a C corporation, whereas shifting income through deductible payments and making an S election can be. Dividends result in double taxation, which these other strategies help avoid.
Step-by-step explanation:
The question relates to strategies for mitigating double taxation in a C corporation. Among the options provided, paying dividends to shareholders is not an effective strategy for avoiding double taxation. In fact, dividends lead to double taxation since the corporation pays taxes on its profits, and then shareholders pay taxes on the dividends they receive. This differs from shifting income via deductible payments and making an S election, both of which can help to mitigate double taxation. Shifting income can be done by compensating shareholders through salaries or rents that are deductible expenses for the corporation. An S election allows a corporation to pass income directly to shareholders without first paying corporate income tax, thereby avoiding taxation at the corporate level.Therefore, the main answer to the question is option 3: Paying dividends to their shareholders is not an effective strategy to mitigate double taxation in a C corporation. The other two options can be effective strategies to reduce or eliminate the burden of double taxation.As a conclusion, to mitigate double taxation for a C corporation, it is essential to understand the tax implications of different corporate actions and choose strategies like shifting income through deductible payments or making an S election, rather than distributing profits as dividends which will be taxed twice.