Riverbend Inc. received a $200,000 dividend from stock it held in Hobble Corpora
ID: 2333777 • Letter: R
Question
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 16-6. (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?
Answer $100,000
200,000 X 50%= $100,000
b. Assuming the facts in part (a), what is Riverbend’s effective tax rate on the dividend?
c. What is Riverbend’s DRD assuming it owns 60 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 85 percent of Hobble Corporation (and is part of the same affiliated group)?
EXHIBIT 16-6 Stock Ownership and Dividends Received Deduction Percentage Dividends Received Deduction Percentage 50% 65 Receiving Corporation's Stock Ownership in Distributing Corporation's Stock Less than 20 percent At least 20 percent but less than 80 percent 80 percent or more22 100Explanation / Answer
a. Since Riverbend owns less than 20% in Hobble, its DRD percentage is 50%.
Hence its full DRD is $200,000 * 20% = $100,000
Riverbend's modified taxable income for taxable income limitation is $2,000,000 ($2,100,000 - $100,000 charitable contribution).
The taxable limit is $2,000,000 * 50% = $1,000,000
Since $1,000,000 is less than taxable income limit, Riverbend may deduct entire $100,000 DRD.
b. Based on the level of taxable income, Riverbend's marginal tax rate is 34%.
Marginal Tax rate on dividend after taking the DRD into account is : [($200,000 - $100,000)*34%]/$200000 = 17%
c. Because riverbend owns 20% or more but less than 80% of Hobble, its DRD percentage is 65%.
Full DRD = 65% of $200,000 = $130,000
Riverbend's Modified Taxable income for taxable limit is $2,100,000 - $100,000 = $2,000,000
Thus taxable income limit is $2,000,000 * 65% = $1,300,000
Since it is less than the taxable income limit, Riverbend may deduct entire $130,000 DRD.
d. Marginal tax rate on dividend = [($200,000 - $130,000) *34%]/$200,000 = 11.90%
e. Since it owns 85% which is more than 80%, Riverbend is entitiled to a 100% DRD.
f. Sinice it is entitled to a100% DRD, it is not entitled to pay any tax on dividend. Hence it is 0%
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