Question

In 2020, Riverbend Inc. received a $200,000 dividend from stock it held in Hobble Corporation. Riverbend's taxable income is $2,100,000 before deducting the dividends-received deduction (DRD), a $40,000 NOL carryover, and a $100,000 charitable contribution. Use Exhibit 13-6. (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 10 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 60 percent of Hobble Corporation?

Answer 1

Answer-a:

Because Riverbend owns less than 20 percent of Hobble, its DRD percentage is 70%.

So, its full DRD is $140,000 (.7 x $200,000). Riverbend’s modified taxable income for the taxable income limitation is $2,000,000 ($2,100,000 minus $100,000 charitable contribution). Thus, the taxable income limit is $1,400,000 ($2,000,000 x 70%). Because the full $140,000 DRD is less than the taxable income limit, Riverbend may deduct the entire $140,000 DRD.

Answer-b:

Marginal tax rate on dividend = [($200,000 - $140,000) x .34]/$200,000 = 10.2%

Answer-c:

Because Riverbend owns 20 percent or more but less than 80% of Hobble, its DRD percentage is 80%.

So, its full DRD is $160,000 (.8 x $200,000). Riverbend’s modified taxable income for the taxable income limitation is $2,000,000 ($2,100,000 minus $100,000 charitable contribution). Thus, the taxable income limit is $1,600,000 ($2,000,000 x 80%). Because the full $160,000 DRD is less than the taxable income limit, Riverbend may deduct the entire $160,000 DRD.