Au Sable Corporation reported taxable income of $800,000 in the current year and paid federal income taxes of $272,000. Not included in the computation was a disallowed penalty of $25,000, life insurance proceeds of $100,000, and a federal income tax refund from 20X2 of $50,000. Au Sable is an accrual-basis taxpayer. The corporation's current E&P for the current year would be:

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Question restatement:
- Au Sable Corporation has taxable income of $800,000 for the current year and paid federal income taxes of $272,000.
- Not included in the computation were a disallowed penalty of $25,000, life insurance proceeds of $100,000, and a federal income tax refund from 20X2 of $50,000.
- It is an accrual-basis taxpayer. The task is to determine the current E&P for the year.

Option A: $875,000
- Start with taxable income: 800,000.
- Add back non-deductible expense: the disallowed penalty of 25,000 increases E&P because penalties are not deductible for E&P purposes.
- Add tax-exempt or otherwise excluded income to E&P: life insurance proceeds of 100,000 are generally excluded from taxable income; for E&P purposes, such tax-exempt income increases E&P, so add 100,000.
- Adjust for tax refunds: a federal income tax refund received in a prior year reduces current E&P, so subtract 50,000.
- Calculation: 800,000 + 25,000 + 100,000 − 50,000 = 875,000.
- Therefore, this option aligns with the standard E&P adjustments described above.

Option B: $653,000
- A misstep here would be treating the 800,000 as the base and only adding back the penalty (25,000) or only selectively adjusting without fully incorporating all items.
- If one added back 25,000 but failed to add the 100,000 life insurance proceeds (or failed to subtract the 50,000 refund correctly), the result would deviate from the correct E&P. For example, 800,000 + 25,000 = 825,000; dropping the 100,000 adds/subtracts further would not yield 653,000 unless additional incorrect subtractions occurred.
- The key error is inconsistent treatment of either the life insurance proceeds (which should increase E&P) or the tax refund (which should decrease E&P).

Option C: $603,000
- This value could arise if one added the penalty but subtracted the life insurance proceeds (or misapplied the tax refund) in a way that dramatically reduces E&P.
- Specifically, 800,000 + 25,000 − 100,000 − 50,000 would yield 675,000, not 603,000; or misapplying other components could push toward 603,000, but such arithmetic would not reflect the standard E&P rules here.
- The incorrect component handling is the root cause for this miscalculation.

Option D: $553,000
- This would require substantial miscounting, such as incorrectly not adding back the 100,000 life insurance proceeds and misapplying the 50,000 refund, or omitting one of the adjustments entirely.
- It reflects a misunderstanding of the need to adjust for non-deductible penalties and tax-exempt income when calculating E&P, resulting in an underestimation.

Summary of correct approach vs. incorrect options:
- The correct approach yields 800,000 + 25,000 + 100,000 − 50,000 = 875,000, which matches Option A.
- The other options arise from partial or incorrect handling of adjustments: failure to add back non-deductible penalties, mischaracterizing life insurance proceeds as not affecting E&P, or misapplying the impact of the tax refund.

Final note: In E&P calculations, always start with taxable income, add back non-deductible expenses (like penalties), add life-insurance proceeds if they are tax-exempt, and subtract tax refunds or other items that reduce E&P. This ensures the E&P figure reflects all standard adjustments shown in the problem.

SU25-BL-BUS-A329-2695 Quiz 19

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