Question

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 $800,000 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.)

Answer 1

Note:-As per IRC 243(a) generally a corporation are entitled to 50% of dividend received from corporation but this deduction is increased to 65%, if owned 20% or more to 80% and for ore than 80% deduction is 100%.
JBD’s after-tax income	$800,000
Dividend paid to ZNO	$176,000	(22% x $8,00,000)
Dividends received deduction	$114,400	(65% x $176,000)
ZNO’s taxable dividend	$61,600	(176,000-114,400)
ZNO’s marginal tax rate	21%
ZNO’s tax	$12,936	(61,600*21%)
ZNO’s overall tax rate	7.35%	(12,936/176,000)
ZNO's tax on dividend	$12,320
ZNO's tax rate on dividend income	7.35%