Question

Wayne Corporation owns 40% of the stock of Robin Corporation and 90% of the stock of Bat Corporation. All of the corporations are U.S. corporations. Wayne has taxable income before the dividends-received deduction of $200,000, and received the following dividends during the year: Robin $ 5,000 Bat 20,000 The dividends-received deduction for Wayne Corporation would be:

A. $23,250
B. $12,500
C. $16,250
D. $20,000

Answer 1

The correct answer is not listed in the options. However, the answer is $23,500. The explanation is given below.

Step-by-step explanation:

It is important to understand the three levels of possible deductions as dividends are collected from US corporations.

1. General rule: DRD is equal to 70% of dividend received
2. If the company receiving the dividend owns more than 20% but less than 80% of the company paying the dividend, the DRD amounts to 80% of the dividend received.
3. If the company receiving the dividend owns more than 80% of the company paying the dividend, the DRD equates to 100% of the dividend.

From our scenario, Wayne corporation holds the following percent holdings.

Robin Corporation = 40%

Bat Corporation = 90%

==> Using the Third Rule, Bat Corporation owns more than 80% which is 100%, therefore, we have:

$20,000 × 100% = $20,000

==> By using the second rule,

deductible amount = $5,000 × 80% = $4,000

==> By applying the general rule to Robin Corporation, we have

$5,000 × 70% = $3,500

Therefore, the total dividend deductible amount is $20,000 + $3,500 = $23,500