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 $2,000,000 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 income (after considering the DRD)? [Hint: See IRC §243.] (Round the "Tax rate on dividend income" to 2 decimal places.)

Answer 1

As per IRC 243(a) mostly a corporation are entitled to 50% of dividend received from corporation which is now subsequently increased to 65%, if owned 20% or more but upto 80% and for ore than 80% deduction is 100%.

Particular	Amount	Calculation
JBD's after tax income	$        2,000,000	given
Share of Dividend to ZNO	$            440,000	Income * 22%
Deduction on dividend	$            286,000	Share of dividend*65%
ZNO's taxable dividend	$            154,000	Share of dividend-Deduction
Marginal tax rate	21%
Tax of ZNO's	$              32,340	Divident*MTR
Tax rate on dividend	7.35%	Tax/ Share of dividend

Tax that ZNO will pay on the dividend it receives from JBD is $32340 and tax rate thereon is 7.35%