Question

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).]

Answer 1

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)