Steve,Inc.,a U.S.shareholder owns 100% of a CFC from which Steve receives a $3 million cash distribution.The CFC's E & P is composed of the following amounts. Steve recognizes a taxable dividend of:

Question

Steve,Inc.,a U.S.shareholder owns 100% of a CFC from which Steve receives a $3 million cash distribution.The CFC's E & P is composed of the following amounts.  Steve recognizes a taxable dividend of:

Quizplus · Accepted Answer

According to the Subpart F rules, the U.S. shareholder is required to include in income the amount of the CFC's earnings that were not previously taxed. In this case, the CFC's E&P of $4 million is greater than the distribution of $3 million, which means that only a portion of the distribution is considered a taxable dividend. The amount of the taxable dividend is the lesser of the distribution or the U.S. shareholder's pro rata share of the CFC's E&P. In this case, the U.S. shareholder's pro rata share of the CFC's E&P is $1.5 million (50% of the total E&P), which is less than the distribution of $3 million. Therefore, the taxable dividend is $1.5 million.

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