parent holding company sells shares in its subsidiary such that the parent now owns only 65% of the subsidiary and, thus, the tax returns of the parent and its subsidiary can't be consolidated The parent receives annual dividends from the subsidiary of $2,500,000 If the parent's marginal tax rate is 34% and if the exclusion on intercompany dividends is 70%, what is the effective tax rate on the intercompany dividends, and how much net dividends are received?
A) 10.2%; $2,245,000
B) 10.2%; $2,135,000
C) 23.8%; $1,905,000
D) 10.2%; $1,750,000
E) 34.0%; $1,650,000

Question

Quizplus · Accepted Answer

First, we need to calculate the exclusion of intercompany dividends. The exclusion is 70%, so the taxable amount of the dividends is $2,500,000 * (1-70%) = $750,000.
Then, we need to calculate the tax on the dividends. The parent's marginal tax rate is 34%, so the tax on $750,000 is $255,000.
So, the effective tax rate on the intercompany dividends is $255,000 / $2,500,000 = 10.2%.
Finally, we need to calculate the net dividends received by the parent. The total dividends received are $2,500,000, but the taxable amount is $750,000. So, the net dividends received are $2,500,000 - $750,000 = $1,750,000.
Therefore, the answer is A) 10.2%; $2,245,000.

Parent Holding Company Sells Shares in Its Subsidiary Such That