Corporation A owns 10% of Corporation C. The marginal tax rate
on non-dividend income for both A and C is 21%. Corporation C earns
a total of $200200000 before taxes in the current year, pays
corporate tax on this income and distributes the remainder
proportionately to its shareholders as a dividend. In addition,
Corporation A owns 40% of partnership P that earns $500200000 in
the current year. Given this fact pattern, answer the following
questions:
a. How much cash from the Corporation C dividend remains after
Corporation A pays the tax on the dividend assuming Corporation A
is eligible for the 50 percent dividends received deduction?
b. If Partnership P distributes all of its current year earnings in
proportion to the partner's ownership percentages, how much cash
from Partnership P does Corporation A have after paying taxes on
its share of income from the partnership?
c. If you were to replace Corporation A with individual A [her
marginal tax rate on ordinary income is 37% and on qualified
dividends is 23.8 percent (including the net investment income
tax)] in the original fact pattern above, how much cash does
individual A have from the Corporation C dividend after all taxes
assuming the dividends are qualified dividends? Consistent with the
original facts, assume that Corporation C distributes all of its
after-tax income to its shareholders.
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