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Riverbend Inc. received a $332,500 dividend from stock it held in Hobble Corporation. Riverbend’s taxable income is $2,260,000 before deducting the dividends received deduction (DRD), a $81,000 NOL carryover, a $33,750 domestic production activities deduction, and a $128,000 charitable contribution. (Use Corporate Tax Rate Table.) (Round your tax rates to 1 decimal place. Enter zero if applicable.)
a. What is Riverbend’s deductible DRD assuming it owns 11 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 50 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 93 percent of Hobble Corporation (and is part of the same affiliated group)?
f. Assuming the facts in part (e), what is Riverbend’s marginal tax rate on the dividend?
Corporate Income lax Rates Taxable Income Tax 15% of the taxable income $7500 + 25% of taxable income over $50,000 $13,750 + 34% of taxable income over $75,000 $22,250 + 39% of taxable income over $100,000 $113,900 + 34% of taxable income over $335,000 $3,400,000 + 35% of taxable income over $10,000,000 $5,150,000+38% of taxable income over $15,000,000 35% of the taxable income $50,000 $50,000-$75,000 $75,000-$100,000 $100,000-$335,000 $335,000-$10,000,000 $10,000,000-$15,000,000 $15,000,000-$18,333,333 Over $18,333,333
Expert Answer
| a. | Riverbend’s holding is less than 20%,DRD =70% | |||||||||
| DRD=Dividend received*DRD %=332500*70%=232750 | ||||||||||
| Modified taxable income=Taxable income-Charitable contribution=$2260000-$128000=$2132000 | ||||||||||
| Taxable income ilimit=Modified taxable income*DRD %=$2132000*70%=1492400 | ||||||||||
| DRD is less than Taxable income limt.Assessee can deduct entire DRD of $232750 | ||||||||||
| b. | Based on taxable income,Riverbend’s marginal tax rate is 34%. | |||||||||
| Riverbend’s marginal tax rate on dividend=(332500-232750)*0.34/332500=10.2% | ||||||||||
| c. | Riverbend’s holding is more than 20% but less than 80%,DRD =80% | |||||||||
| DRD=Dividend received*DRD %=332500*80%=266000 | ||||||||||
| Modified taxable income=Taxable income-Charitable contribution=$2260000-$128000=$2132000 | ||||||||||
| Taxable income ilimit=Modified taxable income*DRD %=$2132000*80%=1705600 | ||||||||||
| DRD is less than Taxable income limt.Assessee can deduct entire DRD of $266000 | ||||||||||
| d. | Based on taxable income,Riverbend’s marginal tax rate is 34%. | |||||||||
| Riverbend’s marginal tax rate on dividend=(332500-266000)*0.34/332500=6.8% | ||||||||||
| e. | Riverbend’s holding is more than 80%,DRD =100% | |||||||||
| DRD=Dividend received*DRD %=332500*100%=332500 | ||||||||||
| f. | Marginal tax rate on dividend=0% since full DRD is eligible for deduction | |||||||||
