Lanco Corporation, an accrual-method corporation, reported taxable income of $1,460,000 this year.
Included in the computation of taxable income were the following items:
• MACRS depreciation of $200,000. Straight line depreciation would have been $120,000.
• A net capital loss carryover of $10,000 from last year
• A net operating loss carryover of $25,000 from last year
• $65,000 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 $5,000
• Life insurance proceeds of $250,000
• Excess current year charitable contribution of $2,500 (to be carried over to next year)
• Tax-deferred gain of $20,000 on a like-kind exchange
• Federal income tax refund from last yearof $35,000
• Non-deductible life insurance premium of $3,500
• Non-deductible interest expense of $1,000 on a loan used to buy tax-exempt bonds
Lanco paid federal income taxes this year of $496,400. The company's accumulated E&P at the beginning of the year was $2,400,000.
During the year, Lanco made the following distributions to its sole shareholder, Luigi (Lug) Nutt:
• June 30: $50,000
• September 30: Parcel of land with a fair market value of $75,000. Lanco's tax basis in the land was $10,000. Lug assumed an existing mortgage on the property of $15,000.
a. Compute Lanco's current E&P for this year.
b. Compute the amount of dividend income reported by Lug Nutt this year as a result of the distributions.
c. Compute Lanco's accumulated E&P at the beginning of next year.