Winner Corporation acquires all of Loser Corporation on January 1 of this year for $1 million when the Federal long-term tax-exempt rate was 4%.Two of the tax attributes that Winner found appealing are Loser's NOL of $100,000 and its negative E & P of $150,000.Before applying any of Loser's tax benefits,Winner has taxable income of $75,000 and E & P of $50,000.Winner pays a dividend of $100,000 to its shareholders.Assuming that taxable income is equal to the current year's E & P,how much of this dividend is taxable?

Question

Quizplus · Accepted Answer

Winner Corporation acquired Loser Corporation with NOL and negative E&P, which are tax attributes that can be carried over to future years to offset taxable income and reduce tax liability. Before applying Loser's tax benefits, Winner has taxable income of $75,000 and E&P of $50,000, which means that $25,000 of Winner's taxable income is not covered by E&P.

When Winner pays a dividend of $100,000 to its shareholders, it will first use its current E&P of $50,000 to offset the dividend, leaving $50,000 of the dividend uncovered. Then, it will use Loser's NOL of $100,000 to offset the remaining $50,000 of taxable income. Since the NOL is fully used up, there is no negative E&P left to cover the rest of the dividend.

Thus, $50,000 of the dividend is taxable, and the answer is B.

Winner Corporation Acquires All of Loser Corporation on January 1