Question

In: Accounting

After several years of profitable operations, Javell, the sole shareholder of JBD Inc., a C corporation,...

After several years of profitable operations, Javell, the sole shareholder of JBD Inc., a C corporation, sold 15 percent of her JBD stock to ZNO Inc., a C corporation in a similar industry. During the current year JBD reports $1,470,000 of after-tax income. JBD distributes all of its after-tax earnings to its two shareholders in proportion to their shareholdings. Assume ZNO’s marginal tax rate is 30 percent.
How much tax will ZNO pay on the dividend it receives from JBD? What is ZNO’s overall tax rate on its dividend income? [Hint: See IRC §243(a).]

Solutions

Expert Solution

Explanation:

According to IRC §243(a), corporations are generally entitled to a 70 percent dividends received deduction. Subsections (b) and (c) go on to provide for a larger dividends received deduction if a corporation owns 20 percent or more of the dividend-paying corporation. In this situation, ZNO, Inc. will receive a 70 percent dividend received deduction on dividends received from JBD, Inc. since ZNO only owns 15 percent of JBD, Inc. ZNO, Inc.'s tax liability of the dividend it receives from JBD, Inc. is calculated in the following table:

Description

(1) JBD's after-tax income

1470000

(2) Dividend paid to ZNO

220500

15% x (1)

(3) Dividends received deduction

154350

70% x (2)

(4) ZNO's taxable dividend

66150

(2) – (3)

(5) ZNO's marginal tax rate

30%

(6) ZNO's tax on dividend

19845

(4) x (5)

(7) ZNO's overall tax rate on dividend

9%

(6) / (2)


Related Solutions

After several years of profitable operations, Javell, the sole shareholder of JBD Inc., a C corporation,...
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 $2,000,000 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...
After several years of profitable operations, Javell, the sole shareholder of JBD Inc., a C corporation,...
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 $2,100,000 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...
2. Deb is the sole shareholder of Timeless Corporation, a calendar year C corporation. In the...
2. Deb is the sole shareholder of Timeless Corporation, a calendar year C corporation. In the current year, Trash earned taxable income of $250,000 and distributed $175,000 to Deb. Kyle is the sole shareholder of Swanky Corporation, an S corporation. In the current year, Swanky earned taxable income of $250,000 and distributed $175,000 to Kyle. Assume both Kyle and Deb are in the highest regular tax bracket (use 37%). Contrast the tax treatment of Timeless Corporation and Deb with the...
Jay is the sole shareholder of James Inc. an S corporation. In 20x1, the S corporation...
Jay is the sole shareholder of James Inc. an S corporation. In 20x1, the S corporation has taxable income of $40,000. Jay's stock basis at January 1st 20x1 is $10,000. In 20x2, James Inc had a loss of $60,000. Which of the following results in 20x2? A) Jay has a stock basis of negative $10,000 B) Jay has a stock basis of $50,000 C) Jay reports a 20X2 loss of $50,000 D)Jay reports a 20X2 loss of $60,000
William Sharp was the sole shareholder and manager of Chickasaw Club, Inc., an S corporation that...
William Sharp was the sole shareholder and manager of Chickasaw Club, Inc., an S corporation that operated a popular nightclub of the same name in Columbus, Georgia. Sharp maintained a corporate checking account but paid the club’s employees, suppliers, and entertainers in cash out of the club’s proceeds. Sharp owned the property on which the club was located. He rented it to the club but made mortgage payments out of the club’s proceeds and often paid other personal expenses with...
Strap Corporation is the sole shareholder of X, Inc. Strap and X do not file a...
Strap Corporation is the sole shareholder of X, Inc. Strap and X do not file a consolidated return, and Strap has held its X stock for more than two years. Strap has a $150,000 basis in its X stock. Boot is a prospective buyer and is willing to purchase all of the X stock, but he is unable to pay the $500,000 price demanded by Strap even though he believes it to be fair. X has $100,000 cash on hand...
Joe Tucker is the sole shareholder of Tucker Parts Inc. The corporation is cash rich, and...
Joe Tucker is the sole shareholder of Tucker Parts Inc. The corporation is cash rich, and Joe wishes to sell his stock to Bill Corker, who has limited funds. The parties proceeds are as follows: a. Joe sells 40 percent of his stock to bill for $50,000 payble over 10 years. b. Tucker Parts redeems the remaining 60 percent of Joe's stock for $75,000 in cash. What are the tax consequences to Joe? Does it make any difference if the...
Rex and Felix are the sole shareholders of the Dogs and Cats Corporation (DCC). After several...
Rex and Felix are the sole shareholders of the Dogs and Cats Corporation (DCC). After several years of operations using the accrual method, they decided to liquidate the corporation and operate the business as a partnership. Rex and Felix hired a lawyer to draw up the legal papers to dissolve the corporation, but they need some tax advice from you, their trusted accountant. They are hoping you will find a way for them to liquidate the corporation while minimizing their...
After several profitable years running her business, Ingrid decided to acquire the assets of a small...
After several profitable years running her business, Ingrid decided to acquire the assets of a small competing business. On May 1 of year 1, Ingrid acquired the competing business for $366,000. Ingrid allocated $61,000 of the purchase price to goodwill. Ingrid’s business reports its taxable income on a calendar-year basis.(Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.) a. How much amortization expense on the goodwill can Ingrid deduct in year 1, year 2, and...
Taxpayer, Inc. (a C corporation) bought a building several years ago to use as a warehouse...
Taxpayer, Inc. (a C corporation) bought a building several years ago to use as a warehouse in its business. It paid $20,000 in cash and assumed a $180,000 debt from the seller in connection with the purchase. Over the years, Taxpayer (properly) deducted $30,000 in straight line depreciation from the date the property was purchased through the date of sale. Taxpayer sold the warehouse in the current year. The buyer paid Taxpayer $50,000 in cash, took the property subject to...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT