Earnings and Profits Tx 8120

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Earnings and ProfitsTx 8120
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Fore Objectives
You should be able to

• Explain the _______ of EP,
• Determine whether EP must follow _____ or
  ________ basis rules.
• Identify differences between EP and ________
  _______, and
• Calculate ________ EP.

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Earnings Profits

• Code describes how certain transactions _____ EP
  but does not _____ the concept
• Purpose
• Measures ________-paying ability
• Represents how much can be distributed without
  dipping into _________
• Not same as
• Taxable income or
• _______ earnings

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Calculating Current EP

• Taxable income (or net operating loss)
• and certain deferred income
• - expenses
• not affecting EP
• (or deficit)
• Current .
• Residual (or shortfall) increases (decreases)
  ______

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Mazzocchi Bus Co. v. CIR(CA-3, 1994)
The owner of a closely-held, _____ basis
corporation diverted corporate receipts for his
personal use and failed to report the gross
income on either the corporate or his individual
return. After the owners conviction for tax
evasion, the corporation paid taxes, penalties,
and interest. To treat some of the constructive
distribution as a return of capital, the
individual argued the corporation can reduce EP
by the ________ but _______ taxes, penalties, and
interest. The ______ was silent on this point.
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Mazzocchi Bus Co. v. CIR(CA-3, 1994)
Relying on a long-standing regulation and
affirming the Tax Court, the holding required
__________. To hold otherwise would
unnecessarily add complexity , undesirably
distort EP, and unjustifiably engraft an
unprincipled exception . Thus, a corporation
calculating taxable income using the cash method
must determine EP ___________.
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Exclusions Increasing CEP

• These items are
• ____ included in gross income
• But ________ ability to pay dividends
• Examples
• ________ bond interest
• _____ insurance proceeds
• _______ income tax refund

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Deferrals Increasing CEP

• Some deferrals require no adjustments
• _________ exchanges
• _____________ conversions
• Transfers under _____
• Installment sales method __________
• CEP increased for ___________ gain when sold
• CEP decreased for __________ gain in later years
• __________ contract method disallowed

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Nondeductibles Decreasing CEP

• These items are
• Not deductible for tax purposes
• But __________ ability to pay dividends
• Examples
• ______ ______ tax paid
• _______ and fines
• _________ contributions and ______ expenses
• _________ person losses and expenses

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Nondeductibles Decreasing CEP (continued)

• Interest expense related to _________ income
• _____ insurance premiums that corporate
  beneficiary pays for ____ employees
• Disallowed travel, ______, and _____________
• Charitable contributions __ ____ of taxable
  income
• Net capital ______
• _______ income tax

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Deductions Not Affecting CEP

• These items are
• Deductible in computing taxable income
• But do not ________ ability to pay dividends
• Dividend _________ deduction
• Carryover deductions from other years
• Net _______ _____ deduction
• ___________ contribution deduction
• ________ loss deduction

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Deductions Not Affecting CEP(continued)

• Excess depreciation
• CEP requires __________ over longer lives of
  __________ depreciation system
• CEP requires ___________ over __ years for any
  amount expensed under 179
• Excess depletion and amortization
• ____ depletion required
• _____________ expenses are capitalized

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Lind et al., p. 168
Taxable Income
CEP
X Corporation is a cash method taxpayer with the
following income and expenses for the
year Gross profit from sales 20,000 Salaries
paid to employees 10,250 Tax-exempt interest
received 3,000 Dividends received from
IBM 5,000 Depreciation 2,800 LTCG from selling
stock 2,500 LTCL from selling stock 5,000 LTCL
carryforward from prior year 1,000 Estimated
federal income tax paid 800 Paid 14,000 this
year for 5-year property but did not elect 179
immediate deduction. For EP purposes, the
property has a 7-year class life. Compute
taxable income and CEP.
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EP Exercise
Taxable Income
CEP
MedCo has the following income and expenses for
the year Gross manufacturing profit 380,000 Ad
ministrative expenses 135,000 Interest
income Corporate notes 43,000 Municipal
bonds 8,000 Key man life insurance
proceeds 200,000 Depreciation Book 55,000 Tax
84,000 ADS 52,000 1231 gain from selling
realty 21,000 NOL carryover from last
year 55,000 Charity Current 4,000 Carryforward
2,000 Penalty for late payment of
tax 1,000 Capital loss from selling
stock 3,000 Compute taxable income and CEP.