Xenia,Inc. ,a U.S.shareholder,owns 100% of Fredonia,a CFC.Xenia receives a $3 million cash distribution from Fredonia.Fredonia's E & P is composed of the following amounts. ∙ $500,000 attributable to previously taxed increases in investment in U.S.property. ∙ $1,500,000 attributable to previously taxed Subpart F income. ∙ $4,800,000 attributable to other E & P. Xenia recognizes a taxable dividend of:

Question

Quizplus · Accepted Answer

Xenia's taxable dividend will be the lesser of the cash distribution received or the amount of Fredonia's current and accumulated E&P (earnings and profits) that are not previously taxed income.

In this case, $2 million of the $6.8 million E&P ($4.8 million + $2 million) is considered previously taxed income (the $500,000 of U.S. property income and the $1.5 million of Subpart F income), leaving $4.8 million of untaxed E&P.

Therefore, Xenia's taxable dividend would be $3 million (the cash distribution) minus $2.8 million of untaxed E&P ($4.8 million - $2 million previously taxed income) which equals $1 million.

So, the correct answer is D) $1 million.

Xenia,Inc ,A U