Question

In the current year, Red Corporation (a calendar year C corporation), which owns stock in Blue Corporation, had net operating income of $200,000 for the year. Blue pays Red a dividend of $40,000. Red takes a dividends received deduction of $20,000. Which of the following statements is correct? a. Red owns 80% or more of Blue Corporation. b. Red owns 20% or more, but less than 80% of Blue Corporation. c. Red owns less than 20% of Blue Corporation. d. Red owns 80% of Blue Corporation.

Answer 1

Answer -

Step - ( 1 ) - Facts of the Question given -

In the current year, Red Corporation (a calendar year C corporation), which owns stock in Blue Corporation, had net operating income of $200000 for the year.

Blue pays Red a dividend of $40000.

Red takes a dividends received deduction of $20000.

.

Step - ( 2 ) - Analysis and Conclusion -

The dividends received deduction is a federal tax deduction.

The dividends received deduction allows a company that receives a dividend from another company to deduct that dividend from its income and reduce its income tax.

In the given case, Red Corporation's dividends received deduction is ( $20000 / $40000 ) = 50% of the dividend received from Blue Corporation.

The 50% dividends received deduction applies, if the percentage of ownership in distributing corporation is Less than 20% ( as per federal income tax law ).

Therefore, Option - ( c ) - Red owns less than 20% of Blue Corporation, is Correct.