Question

Lanco Corporation, an accrual-method corporation, reported taxable income of $1,830,000 this year. Included in the computation of taxable income were the following items:

• MACRS depreciation of $306,000. Straight-line depreciation would have been $211,000.
• A net capital loss carryover of $17,800 from last year.
• A net operating loss carryover of $25,900 from last year.
• $66,500 capital gain from the distribution of land to the company’s sole shareholder (see below).

Not included in the computation of taxable income were the following items:

• Tax-exempt income of $8,000.
• Life insurance proceeds of $295,000.
• Excess current year charitable contribution of $3,300 (to be carried over to next year).
• Tax-deferred gain of $29,600 on a like-kind exchange.
• Federal income tax refund from last year of $41,000.
• Nondeductible life insurance premium of $5,700.
• Nondeductible interest expense of $2,100 on a loan used to buy tax-exempt bonds.

Lanco paid federal income taxes this year of $622,200. The company’s accumulated E&P at the beginning of the year was $3,350,000. During the year, Lanco made the following distributions to its sole shareholder, Luigi (Lug) Nutt:

• June 30: $94,500.
• September 30: Parcel of land with a fair market value of $80,000. Lanco’s tax basis in the land was $13,500. Lug assumed an existing mortgage on the property of $19,200.

Required:

1. Compute Lanco’s current E&P.
2. Compute the amount of dividend income reported by Lug Nutt this year as a result of the distributions.
3. Compute Lanco’s accumulated E&P at the beginning of next year.

Answer 1

CALCULATION OF CURRENT E&P

PARTICULARS	AMOUNT ($)
Taxable Income	1,830,000
ADD:
Excess of MCRS depreciation over straight line method [$306,000-$211,000]	95,000
Net Capital Loss	17,800
Net Operating Loss	25,900
Tax Exempt Income	8,000
Life Insurance Proceeds	295,000
LESS:
Excess Charitable Distribution	(3,300)
Non Deductable Life Insurance Premium	(5,700)
Non Deductable Interest Expense	(2,100)
Current E&P before Taxes	2,260,600
LESS:Federal Taxes for Current Year	(622,200)
Net Current E&P	1,638,400

The federal income tax refund is not added back as Lanco is an accrual basis taxpayer. No adjustment is made for the capital gain recognized on the distribution to Lug as the land has the same basis for income tax and E&P purposes.

b.

Lug reports dividend income of $155,300 which includes the cash distribution of $94,500 and land distribution of $60,800 ($80,000 - $19,200 , mortgage assumed)

c.

PARTICULARS	AMOUNT ($)
Current E&P	1,638,400
LESS:
Cash Dividend	94,500
Fair Market Value of Land	60,800
ADD:
Mortgage assumed by Lug	19,200
Current E&P after distribution	1,502,300
Accumulated E&P at the beginning of year	3,350,000
Accumulated E&P at the beginning of next year	4,852,300

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