Question

Sparrow Corporation (a calendar year, accrual basis taxpayer) had the following transactions in 2019, its second year of operation:
Taxable income $330,000 Federal income tax liability paid 69,300 Tax-exempt interest income 5,000 Business meals expense (total) 3,000 Premiums paid on key employee life insurance 3,500 Increase in cash surrender value attributable to life insurance premiums 700 Proceeds from key employee life insurance policy 130,000 Cash surrender value of life insurance policy at distribution 20,000 Excess of capital losses over capital gains 13,000 MACRS deduction 26,000 Straight-line depreciation using ADS lives 16,000 Section 179 Expense elected in 2018 25,000 Dividends received from domestic corporations (less than 20% owned) 35,000 Sparrow uses the LIFO inventory method, and its LIFO recapture amount increased by $10,000 during 2019. In addition, Sparrow sold property on installment during 2018. The property was sold for $40,000 and had an adjusted basis at sale of $32,000. During 2019, Sparrow received a $15,000 payment on the installment sale. Finally, assume that no additional first-year depreciation was claimed.
a. Indicate whether each item (or part of the item) is "Added" to, "Deducted" from taxable income, or "No effect" when computing current E& P.
b) Sparrow Corporation's current E & P is $ ...............................

Answer 1

Solution and Explanation:

Taxable income $330,000

Federal income tax liability paid    (69,300 )

Tax-exempt interest income     5,000

Disallowed portion of meals and entertainment expenses     (1,500)

Life insurance premiums paid, net of increase

In cash surrender value (3,500 minus 700)  =  (2,800)

Proceeds from life insurance policy, net cash

Surrender value (130,000 minus 20,000) 110,000

Excess capital losses   (13,000)

Expenses (26,000 minus 16,000)   10,000

Allowable portion of 2013 SS 179

Expenses (20% multiply with  25,000)   (5,000)

Dividends received deduction (70% multiply with $35,000)    24,500

LIFO recapture adjustment                                                      10,000

Installment sale gain $(40,000-32,000) / 40,000 * 15,000)$   (3,000)

$394,900