Question

In the current year, Red Corporation (a calendar year C corporation), which owns stock in Blue Corporation, had net operating income of $200,000 for the year. Blue pays Red a dividend of $40,000. Red takes a dividends received deduction of $20,000. Which of the following statements is correct? a. Red owns 80% of Blue Corporation. b. Red owns 20% or more, but less than 80% of Blue Corporation. c. Red owns 80% or more of Blue Corporation. d. Red owns less than 20% of Blue Corporation. e. None of these choices are correct.

Answer 1

The correct statement or the option is D

Step-by-step explanation:

The Corporation which follows a C corporation calendar year, owns the stock in Blue Corporation. And the Blue pays the dividend of $40,000 to Red but Red take a deduction $20,000 of the dividend received.

So, Red's dividend received deduction is % of the dividend received:

= $20,000 / $40,000

= 50%

The 50% dividends received deduction applies when the ownership is less than 20%. Therefore, Red posses less than 20% of Blue Corporation.