622 MODULE 36 TAXES: CORPORATE
C.4.e. Dividends Received Deduction (DRD)
45. (d) The requirement is to determine Best Corp.'s
dividends received deduction for the $100,000 of dividends
received from an unrelated domestic corporation. Dividends
received from less than 20%-owned corporations are gener-
ally eligible for a 70% DRD·(i.e., 70% x dividend). How-
ever, if the corporation's taxable income before the DRD is
less than the amount of dividend, the DRD will be limited to
70% of taxable income, unless the full DRD (70% x divi-
dend) creates or increases a net operating loss. Here, since
taxable income before the DRD ($90,000) is less than the
amount of dividends ($100,000), and the full DRD (70% x
$100,000 = $70,000) would not create a NOL, the DRD is
limited to 70% x $90,000 = $63,000.
46. (c) The requirement is to determine the amount to
be reported as income before special deductions on Acorn's
tax return. A corporation's taxable income before special
deductions generally includes all income and all deductions
except for the dividends received deduction. Thus, Acorn's
income before special deductions would include the sales of
$500,000 and dividend income of $25,000, less the cost of
sales of $250,000, a total of $275,000.
47. (b) The requirement is to determine the correct,
statement regarding the corporate dividends received deduc-
tion (DRD). To qualify for a DRD, the investor corporation
must own the investee's stock for more than forty-five days
(ninety days for preferred stock if the dividends received are
in arrears for more than one year). Answer (a) is incorrect
because the DRD may be limited to the applicable percent-
age of the investor corporation's taxable income. An-
swer (c) is incorrect because a 70% DRD applies to divi-
dends from less-than-20%-owned corporations, an 80%
DRD applies to dividends from unaffiliated corporations that
are at least 20%-owned, while a 100% DRD applies to divi-
dends from corporations that are at least 80%-owned when a
consolidated tax return is not filed.
48. (b) The requirement is to determine-the amount of
dividends to be included in Ryan Corp.'s taxable income.
Since the dividends were received from less than 20%-
owned taxable domestic corporations, they are eligible for a
70% dividends received deduction. Thus, the amount of
dividends to be included in taxable income is $2,000 - (70%
x $2,000) = $600.
49. (b) The requirement is to determine the amount of
dividends to be included in Daly Corp.'s taxable income for
2009. Since the dividends were received from 20%-owned
taxable domestic corporations, they are eligible for an 80%
dividends received deduction. Thus, the amount of divi-
dends to be included in taxable income is $1,000 - (80%'x
$1,000) = $200.
SO. (b) The requirement is to determine the amount of
dividends that qualifies for the 80% dividends received de-
duction. Only dividends received from taxable domestic
unaffiliated corporations that are at least 20%-owned qualify
for the 80% dividends received deduction ($7,500). So-
called "dividends" paid by mutual savings banks are re-
ported as interest, and are not eligible for the dividends re-
ceived deduction. . lowed. $56,800 - $15,000 = $41,800.
C.4.j. Losses
51. (b) The requirement is to determine Stark Corp.'s
net operating loss (NOL) for 2009. A NOL carryover from
2008 would not be allowed in computing the 2009 NOL. In
contrast, a dividends received deduction (DRD) is allowed
in computing a NOL since a corporation's DRD is not sub-
ject to limitation if it creates or increases a NOL. Stark
Corp's NOL would be computed as follows:
Gross income from operations $ 350,000
Dividend income 100,000
Less operating expenses (400 000)
TT before DRD $ 50,000
DRD (70% x $100,000) (70.000)
Net operating loss for 2009 $ (20,000)
52. (b) The requirement is to determine the proper treat-
ment of a C corporation's net capital Losses. A corporation's
capital losses can only be used to offset capital gains. If a
corporation has a net capital loss, it cannot be currently de-
ducted, but instead must be carried back three years and
forward five years as a STCL to offset capital gains in those
years.
53. (b) The requirement is to determine the amount of
Taylor Corp.'s 2009 net operating loss (NOL) that is avail-
able for use in its 2010 return. A net operating loss is gener-
ally carried back two years and forward twenty years to off-
set taxable income in the carryback and carryforward years.
Since Taylor Corp. made no election to waiv~ a carryback
period, the 2009 NOL would be used to offset Taylor's 2007
and 2008 taxable income in the two carryback years (a total
of $70,000) leaving $200,000 - $70,000 = $130,000 to be
carried forward as an NOL deduction in its 2010 return.
54. (b) The requirement is to determine the correct
statement regarding the carry back or carryforward of an
unused net capital loss. A corporation's unused net capital
loss is carried back three years and forward for up to five
years to offset capital gains in the carryback and carryfor-
ward years. An unused net capital loss is always carried
back and forward as a short-term capital loss whether or not
it was short-term when sustained.
SS. (d) The requirement is to determine Haya Corpora-
tion's net operating loss (NOL) for 2009. A deduction for a
net operating loss carry over is not allowed in computing a
NOL. Furthermore, a deduction for charitable contributions
is generally not allowed, since the charitable contributions
deduction is limited to 10% of taxable income before the
charitable contributions and dividends received deductions.
Thus, Haya's NOL for 2009 would be computed as follows:
Gross income $ 600,000
Less expenses (800 000)
$(200,000)
Add back contributions included in
expenses ---..i.QQQ
NOL for 2009
$(195,000)
56. (c) The requirement is to determine the NOL for
2009 given that deductions in the tax return exceed gross
income by $56,800. In computing the NOL for 2009, the
DRD of $6,800 would be fully allowed, but the $15,000
NOL deduction (carryover from 2008) would not be al-
57. (d) The requirement is to determine the amount of
casualty loss deduction available to Ram Corp. due to the