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Riverbend Inc. received a $250,000 dividend from stock it held in Hobble Corporation. Riverbend's taxable income is $2,460,000 before deducting the dividends received deduction (DRD), a $68,500 NOL carryover, a $32,250 domestic production activities deduction, and a $172,000 charitable contribution. (Use Corporate Tax Rate Table.) (Round your tax rates to 1 decimal place. Leave no answer blank. Enter zero if applicable.)

a. What is Riverbend’s deductible DRD assuming it owns 17 percent of Hobble Corporation?

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

c. What is Riverbend’s DRD assuming it owns 51 percent of Hobble Corporation?

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

e. What is Riverbend’s DRD assuming it owns 87 percent of Hobble Corporation (and is part of the same affiliated group)?

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

Answer 1

a) Since, Riverband holds less than 20%, they can deduct 70% DRD from the dividend received. So, its deductible DRD is $ 175,000 (250,000 * 70%). Riverband's modified taxable income is 2,288,000 (2,460,000 - 172,000). Thus taxable limit is $ 1,601,600 (2,288,000 * 0.7). Since the DRD is less than deductible limit, Riverband can deduct $ 175,000 from the dividend received.

b) Based on the facts of taxable income, marginal tax rate of Riverband is 34%.

So, marginal tax rate on dividend is

= (250000-175000)*0.34/250000

=10.2%

c) Here, Riverband owns more than 20% but less than 80%, so DRD applicable is 80%. so, its ful DRD is $ 200,000 (250,000 * 0.8). Riverband's modified taxable income is 2,288,000 (2,460,000 - 172,000). Thus taxable limit is $ 1,830,400 (2,288,000 * 0.8). Since the DRD is less than deductible limit, Riverband can deduct $ 200,000 from the dividend received.

d) Based on the facts of taxable income, marginal tax rate of Riverband is 34%.

So, marginal tax rate on dividend is

= (250000-200000)*0.34/250000

= 6.8%

e) $ 250,000. Because it owns more than 80%, Riverband can reduce full 100% DRD.

f) 0%. Riverband does not pay any tax on dividend.