Eagle Corporation, a calendar year C corporation, owns stock in Hawk Corporation and has taxable income of $100,000 for the year before considering the dividends received deduction. In the current year, Hawk Corporation pays Eagle a dividend of $130,000, which was considered in calculating the $100,000. What amount of dividends received deduction may Eagle claim if it owns 15% of Hawk's stock?
"1) Multiply the dividends received by the deduction percentage ($130,000 × 50% =
$65,000)."
2) Multiply the taxable income before the dividends received deduction by the deduction percentage ($100,000 × 50% = $50,000).
"3) Limit the deduction to the lesser of step 1 or step 2, unless subtracting the amount derived in step 1 ($65,000) from taxable income before the dividends received
Deduction ($100,000) generates an NOL ($100,000 - $65,000 = $35,000 taxable income). If so, use the amount derived in step 1 ($65,000). In this case, the NOL exception to the taxable income limitation does not apply, and the deduction equals
$50,000."
A) $0
B) $50,000
C) $65,000
D) $84,500
E) None of these.

Question

Quizplus · Accepted Answer

The correct amount of dividends received deduction that Eagle Corporation may claim is $50,000. This is because the deduction is limited to the lesser of the calculated deduction ($65,000) or the taxable income before the deduction ($100,000), which, when applying the 50% dividends received deduction rate for a corporation owning less than 20% of another corporation, results in $50,000.

Eagle Corporation, a Calendar Year C Corporation, Owns Stock in Hawk