Question

Griffin Corporation received $88,000 of dividend income from Eagle, Inc. Griffin owns 5 percent of the outstanding stock of Eagle. Griffin’s marginal tax rate is 21 percent.

Required:

1. Calculate Griffin’s allowable dividends-received deduction and its after-tax cash flow as a result of the dividend from Eagle.
2. How would your answers to requirement a change if Griffin owned 55 percent of the stock of Eagle?
3. How would your answers to requirement b change if Griffin owned 85 percent of the stock of Eagle?

Answer 1

Generally, if a corporation receives dividends from another corporation, it is entitled to a deduction of 50 percent of the dividend it receives.[3] If the corporation receiving the dividend owns 20 percent or more, then the amount of the deduction increases to 65 percent.[4] If, on the other hand, the corporation receiving the dividend owns more than 80 percent of the distributing corporation, it is allowed to deduct 100 percent of the dividend it receives

a:- Allowable dividends recieved deduction

= 88,000 x 50% = 44,000

after tax cash flow

dividend recieved = 88,000

tax @ 21% (88000*50%*21%) = 9,240

cash flow after tax = (88,000-9240) =78,760

b:- allowable deduction if 55 percent stock hold is 65%

so deduction will be (88,000x65%) = 57,200

c:- allowable deduction if 85% of stock hold is 100%

so deduction will be 88,000 full