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 $2,100,000 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

Solution:

Given:

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 $2,100,000 of after-tax income.

Assuming that ZNO'S marginal tax rate is 30%

Answer for the above

Explanation:

According to IRC§243(a), corporations are generally entitled to a 70 percent dividends received deduction. Sub-sections (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 22 percent of JBD, Inc ZNO, Inc's tax liability of the dividend it receives from JBD, Inc is calculated in the following table:

Computaion of tax will ZNO pay on dividend & ZNO'S overall tax rate on the dividend income :