Lanco Corporation, an accrual-method corporation, reported taxable income of $2,380,000 this year. Included in the computation...

Lanco Corporation, an accrual-method corporation, reported taxable income of $2,380,000 this year. Included in the computation of taxable income were the following items:

MACRS depreciation of $232,500. Straight-line depreciation would have been $152,000.
A net capital loss carryover of $12,000 from last year.
A net operating loss carryover of $28,600 from last year.
$65,850 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 $7,150.
Life insurance proceeds of $349,000.
Excess current-year charitable contribution of $4,100 (to be carried over to next year).
Tax-deferred gain of $23,100 on a like-kind exchange.
Federal income tax refund from last year of $41,700.
Nondeductible life insurance premium of $4,000.
Nondeductible interest expense of $1,200 on a loan used to buy tax-exempt bonds.

Lanco's accumulated E&P at the beginning of the year was $2,820,000. During the year, Lanco made the following distributions to its sole shareholder, Luigi (Lug) Nutt:

June 30: $67,500.
September 30: Parcel of land with a fair market value of $77,750. Lanco’s tax basis in the land was $11,900. Lug assumed an existing mortgage on the property of $24,000.

Required:

Compute Lanco’s current E&P.
Compute the amount of dividend income reported by Lug Nutt this year as a result of the distributions. Answer: 121,250
Compute Lanco’s accumulated E&P at the beginning of next year.

Expert Solution

a	In the current scenario of L Corporation below is the computation of E & P
	Current E & P	$
	Taxable Income	2380000
	Add
	MACRS depreciation excess over straight line	80500
	Carry over of NCL from last year	12000
	NOL carryover from last year	28600
	Income Tax Exempt	7150
	Proceeds from life insurance	349000
	Less
	Income taxes to be charged at 34%	809200
	Life insurance Premium -Non Deductible	4000
	Life Interest Expense-Non Deductible	1200
	Excess Charitable Contribution	4100
	Current E & P	2038750
Note	As lanco is a tax payer on accrual basis the income tax refund has not been added back
Note	There has been no adjustment which has been done on the capital on the distribution made to Lug as the basis of income tax and E& P on land is the same
b	The amount of dividend reported by Lugo is $67500 cash and land distribution is $77750-$24000
	$67500+$53750=$121250
c	Current scenario	2038750
	Less
	Cash Dividend	67500
	Fair Market Value of Land distributed last yr	77750
	Add
	Mortgage Assumed by lug	24000
	Current E&P after distribution	1917500
	Accumulated E& P at beginning of year	2820000
	Accumulated E&P at beginning of Next Year	$3,835,000

	Accumulated E& P	=	Current E & P +Mortgage+E& P after distribution +accumulated E& P -Cash Dividends-Market Value of Land
		=	2038750+24000+1917500-67500-77750
		=	$3,835,000

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