The Dividend Received Deduction - Term Paper Example

This paper broadly explores the concept of dividends received deduction. Dividend moves from one company to another before it reaches an individual taxpayer, who happens to be a shareholder in the receiving company. For example, if there are two corporations, A and B in such a way that B has shares in A then the dividend will be taxed twice before it reaches the final shareholder, who also will be taxed. This means there will be two 35% taxation at the corporate level and one 23.8% at an individual taxpayer level hence making the real tax to be nearly 68%.

This would even be worse when the dividend has to move a long a series of corporations before it reaches the final stockholder. For example, a situation where company A pays dividend to company B who then pays to C that in turn pays them to the individual shareholders. Following the above stated reasons, pertaining to double taxation, dividends are not taxable thrice or more. As a result, dividends received by a company will be 70% tax-free. Rumpf (2011) asserts that this condition holds unless the corporation in question faces disqualification from this privilege due to some reasons.

Even so, when deciding an individual’s dividend income, it is essential to comprehend or, rather, take into account the relationship between dividend and other taxable partaking such as straddles and constructive sales. The history of dividends received deduction is completely different from that of certain income of tax-exempt corporations. Revenue Ruling 104, 1953-1 C.B. 68 fully explores the policy. According to this ruling, the belief that a corporate tax is paid prior to earnings from which the dividends are distributed supports the credit for dividends earned.

In other words, a corporate tax had been paid on the proceeds that give rise to dividends ahead of the distribution. According to Rakshit and Sarkar (2013), this