Corporate Taxation Question Review

Question 1

Kisco Corp.’s taxable income before taking the dividends-received deduction was $70,000. This includes $10,000 in dividends from an unrelated taxable domestic corporation. Given the following tax rates, what would Kisco’s income tax be before any credits?

Partial Rate Table Tax Rate
Up to $50,000 15%
Over $50,000 but not over $75,000 25%

A.
$10,000

B.
$10,750

C.
$12,500

D.
$15,750

Answer 1

Kisco Corporation’s income tax is $10,750, as calculated below:

Taxable income before taking dividends-received deduction $70,000
Less: Dividends-received deduction ($10,000 × 0.70) (7,000)
Taxable income $63,000

  $50,000 × 0.15 =  $ 7,500
 \+ 13,000 × 0.25 =    3,250
                                $10,750

Question 2

Best Corp., an accrual-basis calendar-year C corporation, received $100,000 in dividend income from the common stock that it held in an unrelated domestic corporation. The stock was not debt-financed and was held for over a year. Best recorded the following information:

Loss from Best’s operations $(10,000)
Dividends received 100,000
———-
Taxable income (before dividends-
received deduction) $ 90,000
==========
Best’s dividends-received deduction on its tax return was:

A.
$100,000.

B.
$80,000.

C.
$70,000.

D.
$63,000.

Answer 2

The correct answer is D.

Loss from Best’s operations ($ 10,000)
Dividends received 100,000
———-
Taxable income (before dividends-
received deduction) $ 90,000 x .70 = $63,000
==========

General Rule

A corporation’s dividends-received deduction (for dividends from unrelated domestic corporations) is 70% of the lesser of the dividend received or taxable income before the dividends-received deduction. A special rule applies if the deduction creates or increases an NOL.

Question 3

Tech Corp. files a consolidated return with its wholly owned subsidiary, Dow Corp. During Year 1, Dow paid a cash dividend of $20,000 to Tech. What amount of this dividend is taxable on the Year 1 consoli­dated return?

A.
$20,000

B.
$14,000

C.
$6,000

D.
$0

Answer 3

The correct answer is D.

When a corporation receives a dividend from its wholly owned subsidiary, the dividend is included in gross income and a 100% dividends-received deduction is allowed. This makes the dividend that was received “taxable” with an offsetting 100% dividends-received deduction allowed, and so makes the net amount equal to zero.