Question

After several years of profitable operations, Javell, the sole shareholder of JBD Inc., a C corporation, sold 22 percent of her JBD stock to ZNO Inc., a C corporation in a similar industry. During the current year JBD reports $2,500,000 of after-tax income. JBD distributes all of its after-tax earnings to its two shareholders in proportion to their shareholdings. How much tax will ZNO pay on the dividend it receives from JBD? What is ZNO’s tax rate on the dividend income (after considering the DRD)? [Hint: See IRC §243.] (Round the "Tax rate on dividend income" to 2 decimal places.)

ZNO’s tax on dividend
ZNO’s tax rate on dividend income		%

Answer 1

Answer:

• If a firm owns more than 20% and less than 80% of the dividend paying corporation, it is entitled to a ( DRD ) Dividend Received Deduction of 80%.
• As ZNO owns 22% of JBD, it is entitled to a 80% DRD.
• Dividend received by ZNC = JBD after tax income x 22%

= 2500000 x 22%

= 550000

• Dividend received deduction = 550000 x 80% = 440000
• Taxable portion of dividend = 550000 x 20% = 110000
• Tax on dividend = 110000 x 20% = 22000
• ZNO overall tax rate on its dividend income = tax on dividend / total dividend received x 100.

= 22000 / 550000 x 100 = 4%