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 $1,300,000 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.)
Tax on the dividend?
tax rate on dividend income? %
Since ZNO is a C corporation, DRD (Dividend Received Deductions) of 65% will be applicable because ZNO owns 22% shares in JBD.
Note: As per IRC 243, 65% is deductible if the percentage of shares owned is between 20% to 80%.
Therefore for ZNO,
Shares owned = 22%
Given: 1. Dividend is distributed in proportion to the shareholding.
2. Entire income is distributed as dividend.
Hence,
Dividend received= 22% of $1300000 = $286000
DRD= 65% * $286000= $185900
Taxable dividend income= $286000 - $ 185900= $100100
Tax on dividend= 21% * $100100= $21021 (Current corporate tax rate is 21%)
Effective tax rate on overall dividend income= Tax on dividend / Dividend received
= ($21021 / $286000)* 100 = 7.35%
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