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

The taxable dividend recognized by Steve is based on the CFC's E&P and the current year's earnings. In this scenario, the CFC's E&P of $4 million is reduced by the $1 million to arrive at a current year's earnings of $3 million, which is equal to the cash distribution received by Steve. As a result, Steve must recognize a taxable dividend of $1.5 million, which is 50% of the $3 million distribution received, due to the participation exemption available to U.S. shareholders of CFCs.