Riverbend Inc. received a $300,000 dividend from stock it held in Hobble Corpora

Question

Riverbend Inc. received a $300,000 dividend from stock it held in Hobble Corporation. Riverbend's taxable income is $2,980,000 before deducting the dividends received deduction (DRD), a $30,000 domestic production activities deduction, and a $182,000 charitable contribution. (Use Corporate Tax Rate Table.)

a. What is Riverbend’s deductible DRD assuming it owns 17 percent of Hobble Corporation?

b. Assuming the facts in part (a), what is Riverbend’s marginal tax rate on the dividend?

c. What is Riverbend’s DRD assuming it owns 37 percent of Hobble Corporation?

d. Assuming the facts in part (c), what is Riverbend’s marginal tax rate on the dividend?

e. What is Riverbend’s DRD assuming it owns 92 percent of Hobble Corporation (and is part of the same affiliated group)?

f. Assuming the facts in part (e), what is Riverbend’s marginal tax rate on the dividend?

Corporate Income Tax Rates Taxable Income Tax $50,000 $50,000-$75,000 $75,000-$100,000 $100,000-$335,000 $335,000-$10,000,000 $10,000,000-$15,000,000 $15,000,000-$18,333,333 Over $18,333,333 15% of the taxable income $7,500 + 25% of taxable income over $50,000 $13,750 + 34% of taxable income over $75,000 $22,250 + 39% of taxable income over $100,000 $113,900 + 34% of taxable income over $335,000 $3,400,000 + 35% of taxable income over $10,000,000 $5,150,000 + 38% of taxable income over $15,000,000 35% of the taxable income

Explanation / Answer

a. Riverbend Inc holds only 17% of stock in Hobble Corporation, which is less than 20%, thereby the dividend deduction allowable is to the extent of 70%. Therefore DRD=70%*$300,000 = $210,000

b. Taxable income =  $2,980,000-$182,000(charitable contribution) = $2,798,000. So limit is 0.7*$2,798,000= $1,958,600. Since DRD amount is less than taxable income, whole amount is allowed. Hence Taxable income becomes = $1,748,600. It falls in 34% bracket. Hence Riverbend's marginal rate of tax is 34%

=($300,000-$210,000/$300,000 ) * .34 = 10.2%

c. In case Riverbend owns 37% of Hobble Corporation, which is greater than 20% but less than 80% and hence the DRD shall be 80%. DRD=0.8*$300,000 = $240000

d. The taxable income limit shall be= $2,798,000*.8 = $2,238,400. Since the DRD is less whole amount is deductible. The tax bracket is 34% Therefore the marginal rate of tax on dividends is 34%.

Marginal tax on dividends= ($300,000-$240,000 / $300,000) * .34 = 6.8%

e. Where Riverbend hold 92% of stocks in Hobble corporation, which is above 80% then 100% of amount is allowed as DRD.

f. Riverbend Inc doesnot have to pay any tax on Dividends since the DRD is 100%, therefore the marginal tax rate on dividends is Nil.

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