So....I totally don't understand the issue with the dividends received deduction and deferred taxes.  I understand both concepts seperately, but I can't understand the issue with the part permanent difference and part temporary difference.  It's driving me crazy.  Can anyone help explain it in a simple way?? 

Thank you!!!! :)

Hi,

I am no genius but will try as best as i could.

Assume you(parent company) own 70% of outstanding c/s of subsidiary co and 30% of outstanding c/s of Investee company.

Addl data  :           ;       Investee co     Subsidiary Co.

Net income                   50,000              100,000

Div paid         &n bsp;         &n bsp;  20,000               60,000

Amount by which deferred taxes will increase DEPENDS ON YOUR EXPECTATIONS.Whether undistributed earnings of the Investee co. will be received via dividends in future or through SALE OF INVESTMENT.Now what is undistributed earnings?As from above it is difference btn NI and Div Paid of Investee co.  i e 30,000.So will this 30,000 in future will be apid thru dividends or future saleof investments.Also note,30,000 * 30% tax rate = 9,000.Original temp diff. uptill this point.(U will have 80% perm diff or 4800 from dividends received).

So uptill now u r expectation is that u will recieve 9,000 in future via dividends.Of that 80% will be deducted as Div.Recd.Deduction or 7,200.So u have to consider tax effects of 1,800(20%).Your def tax liab will increase by 612(1800 x 34% future tax rates).

Now say u  r expectations are that you will receive thru future sale of investment then temp diff is 9,000 and def tax liab = 9,000 * 34% = 3,060.

So in one case u r def tax liab = 612 and in 2ns case def tax liab = 3060.

Hope this much helps and then u can solve some qns and may be post here and some one can explain more from that point on...

Hi!

That helps me a lot!!

However, you lost me at how I will receive part of the net income through sale of investment??  I don't undersatnd that part.  How does that affect me as the investor?  You mean the Investee Co. will buy back my shares of C/S or they will issue more shares of C/S and I will buy more?  I just don't get that one part.  I know it is simple and I'm just missing something small....

The 3rd line from bottom is where I am lost.

Everything else you really cleared up for me!!! THANKS!!!

Hey Heartpeter and HFANDERSOn

SORRY not to get back to you on u r specific qn...I was trying to give u a example so u can be more clear but wiley book has example for only earnings distributed via dividends...

Now I hv a qn myself...WHy is NI on financial books and dividend received shown on tax books...is it because financial income has been earned by Investor/parent and u book it as u earn it abd dividend is actually received so u show in on u r tax return just like we use for Instalment a/c..This is so confusin...