Question

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. (Round your tax rates to 1 decimal place. Leave no answer blank. Enter zero if applicable.)

XHIBIT 16-6 Stock Ownership and Dividends Received Deduction Percentage

Receiving Corporation’s Stock Ownership in Distributing Corporation’s Stock	Dividends Received Deduction Percentage
Less than 20 percent	50%
At least 20 percent but less than 80 percent	65
80 percent or more*	100

* To qualify for the 100 percent dividends received, the receiving and distributing corporations must be in the same affiliated group as described in §1504. The 80 percent ownership requirement is the minimum ownership level required for inclusion in the same affiliated group.

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

DRD $298,000

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

marginal tax rate___%

     

Answer 1

c. Because Riverbend owns 20 percent or more but less than 80% of Hobble, its DRD percentage is 80%. So, its full DRD is $298,000 (0.8 * $372,500). Riverbend's modified taxable income for the taxable income limitation is $2,674,000 ($2,820,000 - $146,000). Thus, the taxable income limit is $2,139,200 ($2,674,000 * 80%). Because the full $298,000 is less than the taxable income limit, Riverbend may deduct the entire $298,000 DRD.

d. Based on its level of taxable income, Riverbend's marginal tax rate is 34%. So, its marginal tax rate on the dividend after taking the DRD account is computed as follows:

[($372,500 - $298,000) * 0.34]/ $372,500 = 6.8%

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