Question

1) discuss the capital gain netting process and its effect on dividend received deduction? [Provide explanation and type your answer and do not copy the answer from chegg study ]

Answer 1

A capital gain or a capital loss results from the sale or other disposition of a capital asset. A prooerty or an asset would be considered a capital asset if it is not held for use in a trade or business, and is not held primarily for the sale to customers in the ordinary course of a trade or business.

All capital gains and losses occurring during a tax year are aggregated through a prescribed netting procedure to determine the net effect of all capital asset transactions for the year. The special tax treatments are applied only to the net results for the year and not to individual transactions.

The following steps can be used to determine the net long-term capital gains for the year.

1.   Segregate all capital gains and losses occurring during the year into short-term gains and losses and long-term   gains and losses.

2.  Combine all long-term gains and losses to determine a net long-term position for the year. Similarly combine all short- term gains and losses to determine a net short-term position for the year as shown below:

Long term gains    = xxx

Long term losses = xxx  

Net long term gain/ (loss) = xxx/ (xxx)

Short term gains = xxx

Short term lossed = (xxx)

Net short term gain / loss = xxx/(xxx)

3.  If the positions determined in step 2 are one is a gain and one is a loss then net the two positions together to obtain either a gain or a loss position for the year. If the positions determined in step 2 are the same i.e., either both are gains or both are losses then no further netting is necessary.

4. When the netting procedure is completed there are four possible types of capital gains and losses that could result. The following table lists those possibilities

Capital gain / loss	Individual	Corporate
Net Long Term Capital Gain	Taxed At minimum rate of 15%	Treated as Ordinary Income
Net Long Term capitl Loss	Deductible loss for adjusted gross income is limited to $3,000 per year  with indefinite carryforward of excess loss to future years netting. If there is any short-term losses they are applied against the $3,000 limit before long-term capital losses are deducted.	No deduction for the current year. But can carry back 3 years and forward 5 years to offset capital gains.
Net Short Term Capital gain	Treated as Ordinary Income	Treated as Ordinary Income
Net Short Term capital loss	Deductible loss for adjusted gross income is limited to $3,000 per year with indefinite carryforward of excess loss to future years netting.	No deduction for the current year, but can carry back 3 years and forward 5 years to offset capital gains.

Dividend received deduction : The dividends received deduction (DRD) is a federal tax deduction in the U.S. that is given to certain corporations that get dividends from related entities. The amount of the dividend that a company can deduct from its income tax is tied to how much ownership the company has in the dividend-paying company.

This IRS provision seeks to alleviate the potential consequences of triple taxation on publicly traded companies, i.e., when the same income is taxed for the company paying the dividend, the company receiving the dividend, and when the shareholder is paid a dividend.

The dividends received deduction is limited with regard to the corporate shareholder's taxable income. A corporation with the rights to a 70% dividends received deduction, can deduct the dividend amount only up to 70% of the corporation's taxable income. Furthermore, a corporation with the rights to an 80% dividends received deduction can deduct the dividend amount only up to 80% of the corporation's taxable income. There are two exceptions to The Taxable Income Limitation. No taxable income restriction is placed on a corporation with a 100% dividends received deduction. Second, if the dividends received deduction increases or creates a net operating loss, the limitation does not apply.

For purposes of determining the appropriate dividends received deduction, a corporate shareholder's taxable income should be computed without including net operating losses , capital loss carrybacks, and the dividends received deduction.