Question

Identify the additional amount of tax that will be due from the taxpayer on the dividends received in each of the scenarios below. TAX YEAR 2018

a. Masha (an individual taxpayer) owns 100 percent of Metro Fashion Corporation. In 2018, she receives a $100,000 dividend from the Corporation. Masha’s other sources of income this year are wages of $80,000 (thus, she is not considered a high income taxpayer).

b. Tyson Corporation owns 100 percent of Lafayette Corporation, and both companies are in the same affiliated group. Lafayette pays Tyson $300,000 in dividends in 2018. Aside from the dividend income, Tyson Corporation earned $400,000 in income from its ordinary operations during the year.

c. Maya Enterprises (a corporate taxpayer) owns 15 percent of Tiger Corporation. Maya Enterprises earned $2 million from its ordinary operations during 2018. Tiger Corporation paid out a total of $1 million in dividends to all its owners, giving each owner a dividend in proportion to its ownership percentage.

Answer 1

a) Assuming the dividend fulfills requirement of qualified dividend.For individuals having ordinary income of $80,000 Tax on dividend will be =$1,00,000*15% = $15,000.

b) Under Sec 263 a 100% Dividend deduction is given to a receiving Corporation if it owns 80% or more of the distributing Corporation. Hence no tax on dividends for Tyson Corporation.

c) Under Sec.263 a 50% Deduction of Total Income is given if a corporation owns less than 20% of the distributing Corporation. Hence additional tax will be 21% of ($1 million *15% (-) $2.15million*50%)=NIL.