Question

# Riverbend Inc. received a \$372,500 dividend from stock it held in Hobble Corporation. Riverbend's taxable income...

Riverbend Inc. received a \$372,500 dividend from stock it held in Hobble Corporation. Riverbend's taxable income is \$2,820,000 before deducting the dividends received deduction (DRD), a \$47,500 NOL carryover, and a \$146,000 charitable contribution. Use Exhibit 16-6.

a. What is Riverbend’s deductible DRD assuming it owns 10 percent of Hobble Corporation?

b. Assuming the facts in part (a), what is Riverbend’s marginal tax rate on the dividend?

c. What is Riverbend’s DRD assuming it owns 31 percent of Hobble Corporation?

d. Assuming the facts in part (c), what is Riverbend’s marginal tax rate on the dividend?

 Solution: Assuming the tax rate is 34% a. As Riverbend ownes less than 20% of Hobble Corporation , its DRD is 70% Deductible DRD = (\$372,500*70%) = \$260,750 b. Assuming the facts in part a , Riverbend's marginal tax rate on dividend [(\$372,500-\$260,750)*34%]/\$372,500 = 10.20% c. As Riverbend ownes more than 20% but less than 80% of Hobble Corporation , its DRD is 80% Deductible DRD = (\$372,500*80%) = \$298,000 d. Assuming the facts in part c , Riverbend's marginal tax rate on dividend [(\$372,500-\$298,000)*34%]/\$372,500 = 6.80%

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