Palmquist Corporation and its 80%-owned subsidiary,Sadler Corporation,are members of an affiliated group.They do not file consolidated tax returns.Sadler had $3,000,000 of income and paid $1,000,000 dividends in 2014.Palmquist and Sadler had 35% income tax rates.What amount of Sadler's dividends is taxable to Palmquist in 2014?

Question

Quizplus · Accepted Answer

Since Palmquist Corporation owns 80% of Sadler Corporation, it can exclude 80% of the dividends received from Sadler from its taxable income under the dividends received deduction (DRD) rules. Given that Sadler paid $1,000,000 in dividends, Palmquist can exclude 80% of this amount, which is $800,000. The remaining 20% ($200,000) is potentially taxable. However, because the question specifies that they do not file consolidated tax returns but are members of an affiliated group, and considering the DRD rules, the entire dividend amount can be excluded from Palmquist's taxable income, leading to $0 being taxable.

Palmquist Corporation and Its 80%-Owned Subsidiary,Sadler Corporation,are Members of an Affiliated