4.
(
12 points: 4 points each
) Identify the
additional
amount of tax that will be due from the
taxpayer
on the dividends received
in each of the scenarios below.
a.
Masha (an individual taxpayer) owns 100 percent of Metro Fashion Corporation. In 2016,
she receives a $100,000 dividend from the Corporation. Masha’s other sources of income
this year are wages of $80,000 (thus, she is not considered a high income taxpayer).
b.
Tyson Corporation owns 100 percent of Lafayette Corporation, and both companies are
in the same affiliated group. Lafayette pays Tyson $300,000 in dividends in 2016. Aside
from the dividend income, Tyson Corporation earned $400,000 in income from its
ordinary operations during the year.
c.
Maya Enterprises (a corporate taxpayer) owns 15 percent of Tiger Corporation. Maya
Enterprises earned $2 million from its ordinary operations during 2016. Tiger
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Hint: We had to determine additional taxes due in the beginning of the class where we determined
whether Bron should take the additional fight. This may help you remember how to estimate the
additional
amount of tax due as opposed to the total tax due in a situation.
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Corporation paid out a total of $1 million in dividends to all its owners, giving each
owner a dividend in proportion to its ownership percentage.
ANSWERS:
a. For individuals, dividends received are taxed at beneficial tax rates. Since Masha is not a
high income taxpayer, she uses the 15% rate (based on how we’ve done this for class). So,
her additional tax is simply = 0.15 x $100,000 =
$15,000
b. For corporations, dividends received are not taxed at separate beneficial rates; instead they
are included in ordinary income. Thus, to determine the additional amount of tax related to
the dividend, you need to know the ordinary taxable income without the dividend and
calculate the tax, then do this when including the dividend, and take the difference in taxes
due in order to determine the additional tax. In addition to the above, you need to apply the
DRD that is appropriate. In this question, because Tyson Corporation owns 100% of
Lafayette, Tyson’s DRD is 100% of the dividend and, thus, there is
no additional tax for the
dividend
.
c. This is also a corporation receiving a dividend; so you need to go through the process
discussed in part b here as well. However, this time the DRD is only 70% rather than 100%
because Maya Enterprises only has 15% of the stock ownership. The relevant net dividend
income to use then is $150,000 ($1M x 0.15 ownership) – $105,000 ($150,000 x 0.70 DRD)
= $45,000. So, first:
Taxes due without dividend using corporate tax rate schedules equates to 0.34 x $2M =
$680,000
Taxes due WITH dividend equates to 0.34 x $2,045,000 = $695,300
Additional tax due = $695,300 - $680,000 =
$15,300
(alternatively = 34% MTR x $45,000)

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