Problem 19-33

Cardinal Corporation, a calendar year taxpayer, receives dividend income of $250,000 from a corporation in which it holds a 10% interest. Cardinal also receives interest income of $35,000 from municipal bonds. (The municipality used the proceeds from the bond issue to construct a library.) Cardinal borrowed funds to purchase the municipal bonds and pays $20,000 of interest on the loan. Excluding these three items, Cardinal's taxable income is $500,000. Cardinal has $150,000 of accumulated E & P at the end of the prior year, and it paid Federal income taxes of $131,250 during the year.

See bottom for the Dividend Received Deduction Table.

a. After these three items are taken into account, Cardinal Corporation's taxable income is $ 625,000. (Correct)

b. Cardinal Corporation's accumulated E & P at the start of next year is $_________. ??

Given: Dividends Received Deduction

Percentage of Ownership by Corporate Shareholder Deduction Percentage

Less than 20% 50%

20% or more (but less than 80%) 65%

80% or more* 100%

*The payor corporation must be a member of an affiliated group with the recipient corporation.