I:16-6 C corporations are allowed a dividends-received deduction (DRD) for dividends received from domestic corporations.

a. What is the purpose of the DRD?

b. Does the taxable income limitation on the DRD serve any purpose?

c. What additional tax liability is incurred by a C corporation when it receives $10,000 of dividend income from a 10%-owned domestic corporation? From a 25%-owned domestic corporation? From a more-than-80% owned domestic corporation?

d. What is the effective tax rate on the dividend income? Hint: the effective tax rate equals the increase in a C corporation’s tax liability divided by the additional gross income that it reports.