Dividends Received Deduction

[Snaggletooth]

Cee Corporation, a C-corp has $100,000 in spare cash. Invests in Macho Funds, a typical "balanced" mutual fund company.

In 2008, Macho pays (and then reinvests in itself) $5000 in dividends. There are $3000 designated as ordinary dividends and $2000 as capital gains. Neither the "qualified" dividends nor capital gains has a rate preference for a C-corporation. But ALL of the $5000 is reinvested back into Macho Funds. Cee Corporation has no other transactions with Macho.

Which of the following are true?

A) Cee Corporation has a dividends received deduction of $4000, and their basis in Macho is now $105,000.
B) Cee Corporation has a dividends received deduction of $4000, but their basis in Macho is now only $101,000 since they were only taxed on $1000 of the $5000 dividends.
C) Cee Corporation has a dividends received deduction of $2400 because only $3000 of the distributions is "true" dividends, and their basis in Macho is now $105,000.
D) Cee Corporation has a dividends received deduction of $2400 and their basis in Macho is now only $102,600 since they were only taxed on $2600 in distributions.
E) None of the above...

[BHoffman]

Cee Corporation, a C-corp has $100,000 in spare cash. Invests in Macho Funds, a typical "balanced" mutual fund company.

In 2008, Macho pays (and then reinvests in itself) $5000 in dividends. There are $3000 designated as ordinary dividends and $2000 as capital gains. Neither the "qualified" dividends nor capital gains has a rate preference for a C-corporation. But ALL of the $5000 is reinvested back into Macho Funds. Cee Corporation has no other transactions with Macho.

Which of the following are true?

A) Cee Corporation has a dividends received deduction of $4000, and their basis in Macho is now $105,000.
B) Cee Corporation has a dividends received deduction of $4000, but their basis in Macho is now only $101,000 since they were only taxed on $1000 of the $5000 dividends.
C) Cee Corporation has a dividends received deduction of $2400 because only $3000 of the distributions is "true" dividends, and their basis in Macho is now $105,000.
D) Cee Corporation has a dividends received deduction of $2400 and their basis in Macho is now only $102,600 since they were only taxed on $2600 in distributions.
E) None of the above...

A google search for "corporate dividend deduction worksheet" supplied links to specific Funds, like American Funds. That website provided a very nifty worksheet that calculates the deduction, but only for their Funds. Here's a link:

https://www.americanfunds.com/resources/tax/corporate-dividends-deduction.htm

Maybe you'll need to peruse Macho's website to find the correct dividend deduction? It would be wonderful if they supplied the worksheet.

I would say that Cee's basis in Macho is now $105k, but not sure.

[Snaggletooth]

Amazing

Ms Hoffman - "Macho" is a fictitious name, but my client's mutual funds just happen to be in the American Funds family! Amazing!

The worksheet really answers the question (By the way, my examples assumed 80% deduction, in reality this corporation is just a casual investor, so 70% would be proper).
Apparently the qualification for the funds is just a pass through of the type of stocks or securities that the fund invests. Great worksheet!!

Thanks, as usual, Snag

[dsi]

I've never had a client I could do this for, but let's say I had an s-corp client who invested in said funds. Would they get a 70/80% exemption on any dividends the s-corp received and passed through via the k-1?

[Snaggletooth]

No

Negative on that one Dave.

Reason being the pass-through nature, and there is no tax at the S-corp level for the deduction to benefit.

However, most of the dividends and capital gains do pass through to the individual, where they are taxed at a preferable rate. Still a good deal - in many ways possibly even better with an S-corp than a C-corp.