Silver Corporation, a calendar year taxpayer, has taxable income of $550,000. Among its transactions for the year are the following: $\begin{array}{lr}\text { Collection of proceeds from insurance policy on life of corporate }\
\text { officer (in excess of cash surrender value) } & \$ 82,500 \
\text { Realized gain (not recognized) on an involuntary conversion } & 11,000 \
\text { Nondeductible fines and penalties } & 44,000
\end{array}$ Disregarding any provision for Federal income taxes, Silver Corporation's current E & P is:

Question

Quizplus · Accepted Answer

Earnings and Profits (E&P) is a measure of a corporation's ability to pay dividends, and it differs from taxable income. To calculate E&P, adjustments must be made to taxable income. In this case, the collection of insurance proceeds ($82,500) is included in E&P because it represents an economic benefit to the corporation. The realized gain on involuntary conversion ($11,000), although not recognized for tax purposes, is also included in E&P as it increases the corporation's economic potential. Nondeductible fines and penalties ($44,000) are subtracted from taxable income in the E&P calculation because they do not reduce the corporation's economic capacity. Therefore, starting with taxable income of $550,000, adding back the insurance proceeds and the gain on involuntary conversion, and subtracting the nondeductible fines and penalties, we get: $550,000 + $82,500 + $11,000 - $44,000 = $599,500. However, the correct calculation and choice provided in the options is: $550,000 + $82,500 = $632,500 (not an option provided), indicating a potential mistake in the question or answer choices. Given the options, the closest correct approach based on the information provided would be to consider only the insurance proceeds as an addition, which is not accurately reflected in any of the choices. Therefore, based on standard E&P calculation methods, none of the provided choices accurately represent the correct calculation.

Silver Corporation, a Calendar Year Taxpayer, Has Taxable Income of $550,000