B compute the dividends received deduction for loon

b. Compute the dividends received deduction for Loon Corporation.
Post-Submission
Answers: $66,300; $123,760.
When a corporation receives a dividend from another corporation, multiple taxation of the same inc
the corporate shareholder a dividends received deduction. The amount of the dividends received de
ownership the recipient corporate shareholder holds in the corporation making the dividend distribu
the deduction percentage is summarized as follows:
Percentage of Ownership by
Corporate Shareholder Deduction Percentage
Less than 20% 50%
20% or more (but less than 80%) 65%
80% or more 100%
The dividends received deduction may be limited to a percentage of the taxable income of a corpora
NOL deduction, the dividends received deduction, the DPAD, or any capital loss carryback. The perc
corresponds to the deduction percentage. Thus, if a corporate shareholder owns less than 20 perce
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corporation, the dividends received deduction is limited to 50 percent of taxable income. However,
corporation has an NOL for the current taxable year.
In working with these myriad rules, the following steps need to be taken:
1. Multiply the dividends received by the deduction percentage.
2. Multiply the taxable income (as previously defined) by the deduction percentage.
3. The deduction is limited to the lesser of step 1 or step 2, unless subtracting the amount derived
generates a negative number. If so, the amount derived in step 1 should be used.
Crane Corporation Loon Corp
Step 1: (50% x dividends received) $66,300 $
Step 2: (50% x taxable income) $22,100 $1
Step 3: Lesser of step 1 or step 2 $66,300 $1
50% x taxable income of $44,200 ($221,000 - $309,400 + $132,600) = $22,100.
50% x taxable income of $247,520 ($353,600 - $371,280 + $265,200) = $123,760.
Crane Corporation qualifies for the loss rule treatment because subtracting $66,300 (step 1) from
yield a loss.
Loon Corporation is subject to the 50 percent of taxable income limitation. It does not qualify for t
subtracting $132,600 (step 1) from the taxable income of $247,520 does not yield a loss.
Solution