Corporation A receives a dividend from Corporation B. It includes the dividend in gross income for tax purposes but includes a pro-rata portion of B's earnings in its financial accounting income. If A has accounted for the dividend correctly (using the general rule), how much of B's stock does A own?
A)A owns less than 20 percent of the stock of B.
B)A owns at least 20 but not more than 50 percent of the stock of B.
C)A owns more than 50 percent of the stock of B.
D)Cannot be determined.

Question

Quizplus · Accepted Answer

If Corporation A owns less than 20% of the stock of Corporation B, then it would be eligible for a dividends-received deduction (DRD) equal to 50% of the dividend amount. This would result in a lower amount of gross income for tax purposes than what was reported by Corporation A. Since Corporation A included the entire dividend amount in gross income, it must own at least 20% but no more than 50% of Corporation B's stock.

Corporation a Receives a Dividend from Corporation B