[Anonymous]

In example 1, the 70% of $100,000 of dividends received deduction is reduced because it did not reduce taxable income to 0, so instead of $70,000 DRD, it is actually $63,000 DRD. My question is, why does this not also apply to example 2, where the DRD for $1,000 is only $700, why is the $700 not also reduced?

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Example 1

In 2013, 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 for 2013:

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 2013 tax return was

A. $100,000

B. $80,000

C. $70,000

D. $63,000

D. If a C corporation owns less than 20 percent of a domestic corporation, 70 percent of dividends received or accrued from the corporation may be deducted.

A C corporation owning 20 percent or more but less than 80 percent of a domestic corporation may deduct 80 percent of the dividends received or accrued from the corporation. Similarly, C corporation owning 80 percent or more of a domestic corporation may deduct 100 percent of the dividends received or accrued from the corporation. However, the dividend received deduction is limited to a percentage of the taxable income of the corporation, unless the corporation sustains a net operating loss. If the corporation has a net operating loss, the dividend received deduction may be taken without limiting the deduction to a percentage of the corporation’s taxable income.

This response uses the correct deduction percentage for Best Corp.’s ownership percentage and correctly limits the dividend received deduction to a percentage of the corporation’s taxable income. The limit is calculated by multiplying taxable income (before the dividend received deduction), i.e., $90,000, by the correct dividend received deduction percentage, i.e., 70 percent.

[Anonymous]

Example 2

John Budd is the sole stockholder of Ral Corp., an accrual basis taxpayer engaged in wholesaling operations.

Ral's retained earnings at January 1, 2013 amounted to $1,000,000.

For the year ended December 31, 2013, Ral's book income, before federal income tax, was $300,000.

Included in the computation of this $300,000 were the following:

Dividends received on 500 shares of stock of a taxable domestic corporation that had 1,000,000 shares of stock outstanding (Ral had no portfolio indebtedness) $ 1,000

Loss on sale of investment in stock of unaffiliated corporation (this stock had been held for two years; Ral had no other capital gains or losses) (5,000)

Keyman insurance premiums paid on Budd's life (Ral is the beneficiary of this policy) 3,000

Group term insurance premiums paid on $10,000 life insurance policies for each of Ral's four employees (the employees' spouses are the beneficiaries) 4,000

Amortization of cost of acquiring a perpetual dealer's franchise (Ral paid $48,000 for this franchise on July 1, 2013, and is amortizing it over a 48-month period) 6,000

Contribution to a recognized, qualified charity (this contribution was authorized by Ral's board of directors in December 2012, to be paid on January 31, 2013) 75,000

On December 1, 2013, Ral received advance rental of $27,000 from a tenant for a three-year lease commencing January 1, 2014 to cover rents for the years 2014, 2015, and 2016. In conformity with GAAP, Ral did not include any part of this rental in its income statement for the year ended December 31, 2013.

What portion of the dividend revenue should be included in Ral's 2013 taxable income?

A. $150

B. $200

C. $300

D. $900

C. Since Ral Corp. owns less than 20 percent of the domestic corporation that paid the dividends (500 shares of 1,000,000 total shares), it may take a 70 percent dividend received deduction for the dividends.

Hence, Ral Corp. would include $300 of its dividend revenue in its taxable income. If Ral Corp. owned 20 or more but less than 80 percent of the domestic corporation, it could have deducted 80 percent of the dividends. Similarly, if 80 percent or more of the corporation was owned, 100 percent of the dividends would be deductible. Thus, this response is correct.

[Anonymous]

Example 2

John Budd is the sole stockholder of Ral Corp., an accrual basis taxpayer engaged in wholesaling operations.

Ral's retained earnings at January 1, 2013 amounted to $1,000,000.

For the year ended December 31, 2013, Ral's book income, before federal income tax, was $300,000.

Included in the computation of this $300,000 were the following:

Dividends received on 500 shares of stock of a taxable domestic corporation that had 1,000,000 shares of stock outstanding (Ral had no portfolio indebtedness) $ 1,000

Loss on sale of investment in stock of unaffiliated corporation (this stock had been held for two years; Ral had no other capital gains or losses) (5,000)

Keyman insurance premiums paid on Budd's life (Ral is the beneficiary of this policy) 3,000

Group term insurance premiums paid on $10,000 life insurance policies for each of Ral's four employees (the employees' spouses are the beneficiaries) 4,000

Amortization of cost of acquiring a perpetual dealer's franchise (Ral paid $48,000 for this franchise on July 1, 2013, and is amortizing it over a 48-month period) 6,000

Contribution to a recognized, qualified charity (this contribution was authorized by Ral's board of directors in December 2012, to be paid on January 31, 2013) 75,000

On December 1, 2013, Ral received advance rental of $27,000 from a tenant for a three-year lease commencing January 1, 2014 to cover rents for the years 2014, 2015, and 2016. In conformity with GAAP, Ral did not include any part of this rental in its income statement for the year ended December 31, 2013.

What portion of the dividend revenue should be included in Ral's 2013 taxable income?

A. $150

B. $200

C. $300

D. $900

C. Since Ral Corp. owns less than 20 percent of the domestic corporation that paid the dividends (500 shares of 1,000,000 total shares), it may take a 70 percent dividend received deduction for the dividends.

Hence, Ral Corp. would include $300 of its dividend revenue in its taxable income. If Ral Corp. owned 20 or more but less than 80 percent of the domestic corporation, it could have deducted 80 percent of the dividends. Similarly, if 80 percent or more of the corporation was owned, 100 percent of the dividends would be deductible. Thus, this response is correct.

[Anonymous]

Haven't dealt with this in a long time, but I believe the answer is in your original question –> “did not reduce taxable income”

In Ex. 1, there is only 90,000 of income due to the loss eating away a portion of the dividends. Therefore, the DRD only applies to the 90,000 of income. 70% * 90,000 = 63,000 DRD

In Ex. 2 (ill admit I didn't read the whole thing), Ral has $300,000 in income. Because there is income and not a loss (as in Ex. 1) the entire DRD is taken into account. 70% of 1,000 = 700 DRD (or $300 included in income)

[Anonymous]

Haven't dealt with this in a long time, but I believe the answer is in your original question –> “did not reduce taxable income”

In Ex. 1, there is only 90,000 of income due to the loss eating away a portion of the dividends. Therefore, the DRD only applies to the 90,000 of income. 70% * 90,000 = 63,000 DRD

In Ex. 2 (ill admit I didn't read the whole thing), Ral has $300,000 in income. Because there is income and not a loss (as in Ex. 1) the entire DRD is taken into account. 70% of 1,000 = 700 DRD (or $300 included in income)

[PocketsWithCash]

Posted this in another thread on a similar question, but it should help:

Step 1: Does the DRD add to or create a loss?

If Yes – > Full DRD

If no – > Step 2

Step 2: Is taxable income < dividends received?

If Yes – > DRD% * Taxable Income, in example 1: 70% * $90,000 = $63,000

If No – > Full DRD, in example 2: income > dividends: 70% * 1,000 = $700 ($300 in income)

FAR 97
REG 91
AUD 5/30/14
BEC 7/11/14

[PocketsWithCash]

Posted this in another thread on a similar question, but it should help:

Step 1: Does the DRD add to or create a loss?

If Yes – > Full DRD

If no – > Step 2

Step 2: Is taxable income < dividends received?

If Yes – > DRD% * Taxable Income, in example 1: 70% * $90,000 = $63,000

If No – > Full DRD, in example 2: income > dividends: 70% * 1,000 = $700 ($300 in income)

FAR 97
REG 91
AUD 5/30/14
BEC 7/11/14

[Anonymous]

Gotcha, thanks guys. One concept down, about 1000 more to go lol.

[Anonymous]

Gotcha, thanks guys. One concept down, about 1000 more to go lol.

[Author]

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