Question

During the current year, Cowboy Corporation (a calendar year C corporation) has the following transactions: 7. Income from operations Expenses from operations Dividends received from Roadway Corporation $260,000 305,000 215,000 a. Cowboy owns 5% of Roadway Corporation's stock. How much is Cowboy Corporation's taxable income (loss) for the year? b. Would your answer change ifCowboy owned 25% of Roadway Corporation's stock?

Answer 1

A)The dividend received deduction is 70%of dividend received however same is restricted if deduction Does not results in net operating loss. In such case dividend received deduction is restricted to 70% of taxable income.

Income from operations	260000
Dividend received	215000
Total revenue	475000
Less expense for operations	(305000)
Taxable incomebefore DRD	170000
Less dividend received deduction (170000*.70)	(119000)
Taxable income	51000

**The deduction of 215000*.70=150500 does not result in net operating loss.

B)

There is no limitation. The actual dividend received deduction is allowed which is 80%of dividend received  

Income from operations	260000
Dividend received	215000
Total revenue	475000
Less expense	(305000)
Dividend received deduction (215000*.80)	(172000)
Taxable income	(2000)