Question

Riverbend Inc. recelved a $222,500 dividend from stock It held In Hobble Corporation. Riverbend's taxable Income Is $2,800,000 before deducting the dividends recelved deduction (DRD), a $80,000 NOL carryover, and a $147000 charltable contribution. Use Exhlbit 16-6. (Round your tex rates to 1 decimal plece. Leave no answer blank. Enter zero If applicable.)

Answer 1

a) Because Riverbend owns less than 20 percent of Hobble, its DRD percentage is 50%. So, its full DRD is $111250 (.5 x $222,500). Riverbend’s modified taxable income for the taxable income limitation is $2,653,000 ($2,800,000 minus $147,000 charitable contribution). Thus, the taxable income limit is $111250 ($2,22500 x 50%). Because the full $111250 DRD is less than the taxable income limit, Riverbend may deduct the entire $111250 DRD

b) 8.3%. Based on its level of taxable income, Riverbend’s marginal tax rate is 34%. So, its marginal tax rate on the dividend after taking the DRD into account is computed as follows: [($222,500 - $111250) x .34]/$222,500 = 8.3%

c) Because Riverbend owns 20 percent or more but less than 80% of Hobble, its DRD percentage is 65%. So, its full DRD is $160,000 (.65x $222,500). Riverbend’s modified taxable income for the taxable income limitation is $2,653,000 ($2,800,000 minus $147,000 charitable contribution). Thus, the taxable income limit is $144625 ($2,225,00 x 65%). Because the full $144625 DRD is less than the taxable income limit, Riverbend may deduct the entire $144625 DRD.

d) 11.9%. Based on its level of taxable income, Riverbend’s marginal tax rate is 34%. So, its marginal tax rate on the dividend after taking the DRD into account is computed as follows: [($222,500 - $144,625) x .34]/$222,500 = 11.9%

e) $222500. Because it owns 80% or more of Hobble Corp., Riverbend is entitled to a 100% DRD.

f) 0%. Riverbend does not pay any tax on the dividend.