Final answer:
The statement presented is false. Terrapin Corporation cannot deduct its federal income taxes in computing its current earnings and profits for year 1, since federal income taxes are paid after the earning and profits computation.
Step-by-step explanation:
The statement is false. Terrapin Corporation incurs federal income taxes of $250,000 in year 1, but it cannot deduct these federal income taxes in computing its current earnings and profits for that year. Federal income taxes are paid after earnings and profits have been calculated, as they are a consequence of a corporation's profitability and should be accounted for separately from the calculation of earnings and profits. Under U.S. tax law, federal income taxes are not a deductible expense when computing taxable income. Furthermore, the effective tax rate paid by a corporation is applied only after accounting for any applicable deductions and credits.