Question

Two days before the ex-dividend date, Drexel Corporation buys 100 shares of Zebra Corporation stock (less

than 1%) for $200,000. Drexel Corporation receives $10,000 of dividends from Zebra Corporation. Two weeks
after the ex-dividend date, Drexel Corporation sells the Zebra Corporation stock for $190,000. Which of the
following statements is correct?
A) Drexel Corporation cannot take a dividends-received deduction on the Zebra Corporation dividend.
B) Drexel Corporation will be allowed a 50% dividends-received deduction when reporting the Zebra Corporation dividend.
C) Drexel Corporation will receive no dividends-received deduction because the stock was purchased ex-dividend.
D) Drexel Corporation cannot recognize a capital loss.

Answer 1

Drexel Corporation is eligible for a 50% dividends-received deduction on the Zebra Corporation dividend and can recognize a capital loss from the sale of the stock.

Step-by-step explanation:

The correct statement regarding Drexel Corporation's transaction involving Zebra Corporation stock is that Drexel Corporation will be allowed a 50% dividends-received deduction when reporting the Zebra Corporation dividend. This is based on the U.S. tax code allows for a dividends-received deduction for corporations to avoid double taxation of those earnings, which applies to dividends received from domestic corporations subject to income tax. As the ownership is less than 20%, the typically allowed deduction rate would be 50%. Although Drexel Corporation bought the shares two days before the ex-dividend date, they are still entitled to receive the dividend and take the applicable deduction.

Drexel Corporation also experienced a capital loss when the stock was sold for $190,000 after being purchased for $200,000. The loss realized from the transaction is reflected in the difference between the purchase and sale prices of the Zebra Corporation's stock. This capital loss can potentially be recognized for tax purposes, subject to IRS rules and limitations on capital losses.