Deck 13: Earnings Profits and Distributions

Question 1

A deficit in current E & P is treated as occurring ratably during the year, unless the taxpayer can show otherwise.

Answer 1

True

Question 2

An increase in the LIFO recapture amount must be added to taxable income to determine E & P.

Answer 2

True

Question 3

A realized gain from an involuntary conversion under § 1033 that is not recognized for income tax purposes has no effect on E & P.

Answer 3

True

Question 4

Nondeductible meal and entertainment expenses must be subtracted from taxable income to determine current E & P.

Question 5

The terms "earnings and profits" and "retained earnings" are identical in meaning.

Question 6

No E & P adjustment is required for regular tax gains under the installment method.

Question 7

A distribution in excess of E & P is treated as capital gain by shareholders.

Question 8

Distributions by a corporation to its shareholders are presumed to be a dividend unless the parties can prove otherwise.

Question 9

A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation's E & P.

Question 10

When computing current E & P, taxable income must be adjusted for the deferred gain in a § 1031 like-kind exchange.

Question 11

A corporation borrows money to purchase State of Texas bonds.The interest on the loan has no impact on either taxable income or current E & P.

Question 12

Use of MACRS cost recovery when computing taxable income does not require an E & P adjustment.

Question 13

To determine current E & P, taxable income must be increased for any domestic production activities deduction.

Question 14

The dividends received deduction has no impact on E & P.

Question 15

All cash distributions received from a corporation with a positive balance in accumulated E & P at the beginning of the year will be taxed as dividend income.

Question 16

To determine E & P, some (but not all) previously excluded income items are added back to taxable income.

Question 17

All distributions that are not dividends are a return of capital and decrease the shareholder's basis.

Question 18

In the current year, Carnation Corporation has a § 179 expense of $20,000.As a result, in the current year, taxable income must be increased by $16,000 to determine current E & P.

Question 19

When computing E & P, taxable income is not adjusted for § 179 expense.

Question 20

Federal income tax paid in the current year must be subtracted from taxable income to determine E & P.

Question 21

In a property distribution, the amount of dividend income recognized by a shareholder is always reduced by the amount of liability assumed by a shareholder.

Question 22

If a stock dividend is taxable, the shareholder's basis in the newly received shares is equal to the fair market value of the shares received in the distribution.

Question 23

As a result of a redemption, a shareholder's interest (direct and indirect) in the corporation decreased from 80% to 55%.The redemption qualifies for sale or exchange treatment as a disproportionate redemption.

Question 24

The built-in loss limitation in a complete liquidation does not apply to losses attributable to a decline in a property's fair market value after its transfer to the corporation.

Question 25

When current E & P has a deficit and accumulated E & P is positive, the two accounts are netted at the date of the distribution.If a positive balance results, the distribution is a dividend to the extent of the balance.

Question 26

A corporation that distributes a property dividend must reduce its E & P by the adjusted basis of the property less any liability on the property.

Question 27

Property distributed by a corporation as a dividend is subject to a liability in excess of its basis.For purposes of determining gain on the distribution, the basis of the property is treated as being not less than the amount of liability.

Question 28

When current E & P is positive and accumulated E & P has a deficit balance, the two accounts are netted for dividend determination purposes.

Question 29

If there is sufficient E & P, a distribution of nonconvertible preferred stock to common shareholders is taxable.

Question 30

A shareholder's basis in property acquired in a stock redemption is the property's fair market value as of the date of redemption.

Question 31

The tax treatment of corporate distributions at the shareholder level does not depend on:

A)The character of the property being distributed.
B)The earnings and profits of the corporation.
C)The basis of stock in the hands of the shareholder.
D)Whether the distributed property is received by an individual or a corporation.
E)None of the above.

Question 32

Corporate distributions are presumed to be paid out of E & P and are treated as dividends unless the parties to the transaction can show otherwise.

Question 33

In general, if a shareholder's ownership interest is not diminished as a result of a stock redemption, the Code will treat the transaction as a sale or exchange.

Question 34

Corporate shareholders generally receive less favorable tax treatment from a qualifying stock redemption than from a dividend distribution.

Question 35

Regardless of any deficit in current E & P, distributions during the year are taxed as dividends to the extent of accumulated E & P.

Question 36

Constructive dividends have no effect on a distributing corporation's E & P.

Question 37

Under certain circumstances, a distribution can generate (or add to) a deficit in E & P.

Question 38

During the year, Blue Corporation distributes land to its sole shareholder.If the fair market value of the land is less than its adjusted basis, Blue will not be able to recognize a loss on the distribution.

Question 39

A corporate shareholder that receives a constructive dividend cannot apply a dividends received deduction to the distribution.

Question 40

Constructive dividends do not need to satisfy the legal requirements for a dividend as set forth by applicable state law.

Question 41

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

A)$500,500.
B)$588,500.
C)$599,500.
D)$687,500.
E)None of the above.

Question 42

Rose Corporation (a calendar year taxpayer) has taxable income of $300,000, and its financial records reflect the following for the year. $\begin{array}{lr}\text { Federal income taxes paid } & \$ 110,000 \\\text { Net operating loss carry forward deducted currently } & 70,000 \\\text { Gain recognized this year on an installment sale from a prior year } & 44,000 \\\text { Depreciation deducted on tax return (ADS depreciation woul d have been } \$ 10,000) & 40,000\\\text { Interest income on Iowa state bonds } & 8,000\end{array}$ ? Rose Corporation's current E & P is:

A)$254,000.
B)$214,000.
C)$194,000.
D)$104,000.
E)None of the above.

Question 43

Stacey and Andrew each own one-half of the stock in Parakeet Corporation, a calendar year taxpayer.Cash distributions from Parakeet are: $350,000 to Stacey on April 1 and $150,000 to Andrew on May 1.If Parakeet's current E & P is $60,000, how much is allocated to Andrew's distribution?

A)$5,000
B)$10,000
C)$18,000
D)$30,000
E)None of the above

Question 44

During the current year, Hawk Corporation sold equipment for $600,000 (adjusted basis of $360,000).The equipment was purchased a few years ago for $760,000 and $400,000 in MACRS deductions have been claimed.ADS depreciation would have been $300,000.As a result of the sale, the adjustment to taxable income needed to determine current E & P is:

A)No adjustment is required.
B)Subtract $100,000.
C)Add $100,000.
D)Add $80,000.
E)None of the above.

Question 45

Tungsten Corporation, a calendar year cash basis taxpayer, made estimated tax payments of $800 each quarter in 2017, for a total of $3,200.Tungsten filed its 2017 tax return in 2018 and the return showed a tax liability $4,200.At the time of filing, March 15, 2018, Tungsten paid an additional $1,000 in Federal income taxes.How does the additional payment of $1,000 impact Tungsten's E & P?

A)Increase by $1,000 in 2017.
B)Increase by $1,000 in 2018.
C)Decrease by $1,000 in 2017.
D)Decrease by $1,000 in 2018.
E)None of the above.

Question 46

Aaron and Michele, equal shareholders in Cavalier Corporation, receive $25,000 each in distributions on December 31 of the current year.During the current year, Cavalier sold an appreciated asset for $60,000 (basis of $15,000).Payment for the sale of the asset will be made as follows: 50% next year and 50% in the following year, with interest payable at a rate of 6 percent.Before considering the effect of the asset sale, Cavalier's current year E & P is $40,000 and it has no accumulated E & P.How much of Aaron's distribution will be taxed as a dividend?

A)$0
B)$20,000
C)$25,000
D)$42,500
E)None of the above

Question 47

Which of the following statements is incorrect with respect to determining current E & P?

A)All tax-exempt income should be added back to taxable income.
B)Dividends received deductions should be added back to taxable income.
C)Current year charitable contributions in excess of the 10% of taxable income limit should be subtracted from taxable income.
D)Federal income tax refunds should be added back to taxable income.
E)None of the above statements are incorrect.

Question 48

Tangelo Corporation has an August 31 year-end.Tangelo had $50,000 in accumulated E & P at the beginning of its 2018 fiscal year (September 1, 2017) and during the year, it incurred a $75,000 operating loss.It also distributed $65,000 to its sole shareholder, Cass, on November 30, 2017.If Cass is a calendar year taxpayer, how should she treat the distribution when she files her 2017 income tax return (assuming the return is filed by April 15, 2018)?

A)$65,000 of dividend income.
B)$60,000 of dividend income and $5,000 recovery of capital.
C)$50,000 of dividend income and $15,000 recovery of capital.
D)The distribution has no effect on Cass in the current year.
E)None of the above.

Question 49

Tern Corporation, a cash basis taxpayer, has taxable income of $500,000 for the current year.Tern elected $25,000 of § 179 expense.It also had a related party loss of $20,000 and a realized (not recognized) gain from an involuntary conversion of $75,000.It paid Federal income tax of $150,000 and paid a nondeductible fine of $10,000.Tern's current E & P is:

A)$415,000.
B)$350,000.
C)$340,000.
D)$320,000.
E)None of the above.

Question 50

Robin Corporation, a calendar year taxpayer, has a deficit in current E & P of $200,000 and a $580,000 positive balance in accumulated E & P.If Robin determines that a $700,000 distribution to its shareholders is appropriate at some point during the year, what is the maximum amount of the distribution that could potentially be treated as a dividend?

A)$0
B)$380,000
C)$480,000
D)$580,000
E)None of the above

Question 51

Tracy and Lance, equal shareholders in Macaw Corporation, receive $600,000 each in distributions on December 31 of the current year.Macaw's current year taxable income is $1 million and it has no accumulated E & P.Last year, Macaw sold an appreciated asset for $1,200,000 (basis of $400,000).Payment for one-half of the sale of the asset was made this year.How much of Tracy's distribution will be taxed as a dividend?

A)$0
B)$300,000
C)$500,000
D)$600,000
E)None of the above

Question 52

Cedar Corporation is a calendar year taxpayer formed in 2013.Cedar's E & P before distributions for each of the past 5 years is listed below. $$\begin{array} { l l } 2017 & \$ 28,000 \\2016 & \$ 40,000 \\2015 & \$ 39,000 \\2014 & \$ 68,000 \\2013 & \$ 16,000\end{array}$$ ? Cedar Corporation made the following distributions in the previous 5 years. 2016 Land (basis of $\$ 70,000$ , fair market value of $\$ 80,000$ )
$2013 \quad \$ 20,000$ cash ?
Cedar's accumulated E & P as of January 1, 2018 is:

A)$91,000.
B)$95,000.
C)$101,000.
D)$105,000.
E)None of the above.

Question 53

As of January 1, Cassowary Corporation has a deficit in accumulated E & P of $100,000.For the tax year, current E & P (accrued ratably) is $240,000 (prior to any distributions).On July 1, Cassowary Corporation distributes $275,000 to its sole shareholder.The amount of the distribution that is a dividend is:

A)$20,000.
B)$140,000.
C)$240,000.
D)$275,000.
E)None of the above.

Question 54

On January 2, 2017, Orange Corporation purchased equipment for $300,000 with an ADS recovery period of 10 years and a MACRS useful life of 7 years.Section 179 was not elected.MACRS depreciation properly claimed on the asset, including depreciation in the year of sale, totaled $79,605.The equipment was sold on July 1, 2018, for $290,000.As a result of the sale, the adjustment to taxable income needed to arrive at current E & P is:

A)No adjustment is required.
B)Decrease $49,605.
C)Increase $49,605.
D)Decrease $79,605.
E)None of the above.

Question 55

Maria and Christopher each own 50% of Cockatoo Corporation, a calendar year taxpayer.Distributions from Cockatoo are: $750,000 to Maria on April 1 and $250,000 to Christopher on May 1.Cockatoo's current E & P is $300,000 and its accumulated E & P is $600,000.How much of the accumulated E & P is allocated to Christopher's distribution?

A)$0
B)$75,000
C)$150,000
D)$300,000
E)None of the above

Question 56

Blue Corporation has a deficit in accumulated E & P of $300,000 and has current E & P of $225,000.On July 1, Blue distributes $250,000 to its sole shareholder, Sam, who has a basis in his stock of $52,500.As a result of the distribution, Sam has:

A)Dividend income of $225,000 and reduces his stock basis to $27,500.
B)Dividend income of $52,500 and reduces his stock basis to zero.
C)Dividend income of $225,000 and no adjustment to stock basis.
D)No dividend income, reduces his stock basis to zero, and has a capital gain of $250,000.
E)None of the above.

Question 57

Renee, the sole shareholder of Indigo Corporation, sold her stock to Chad on July 1 for $180,000.Renee's stock basis at the beginning of the year was $120,000.Indigo made a $60,000 cash distribution to Renee immediately before the sale, while Chad received a $120,000 cash distribution from Indigo on November 1.As of the beginning of the current year, Indigo had $26,000 in accumulated E & P, while current E & P (before distributions) was $90,000.Which of the following statements is correct?

A)Renee recognizes a $60,000 gain on the sale of the stock.
B)Renee recognizes a $64,000 gain on the sale of the stock.
C)Chad recognizes dividend income of $120,000.
D)Chad recognizes dividend income of $30,000.
E)None of the above.

Question 58

Glenda is the sole shareholder of Condor Corporation.She sold her stock to Melissa on October 31 for $150,000.Glenda's basis in Condor stock was $50,000 at the start of the year.Condor distributed land to Glenda immediately before the sale.Condor's basis in the land was $20,000 (fair market value of $25,000).On December 31, Melissa received a $75,000 cash distribution from Condor.During the year, Condor has $20,000 of current E & P and its accumulated E & P balance on January 1 is $10,000.Which of the following statements is true?

A)Glenda recognizes a $110,000 gain on the sale of her stock.
B)Glenda recognizes a $100,000 gain on the sale of her stock.
C)Melissa receives $5,000 of dividend income.
D)Glenda receives $20,000 of dividend income.
E)None of the above.

Question 59

Pheasant Corporation, a calendar year taxpayer, has $400,000 of current E & P and a deficit in accumulated E & P of $180,000.If Pheasant pays a $600,000 distribution to its shareholders on July 1, how much dividend income do the shareholders report?

A)$0
B)$20,000
C)$220,000
D)$400,000
E)None of the above

Question 60

Falcon Corporation ended its first year of operations with taxable income of $250,000.At the time of Falcon's formation, it incurred $50,000 of organizational expenses.In calculating its taxable income for the year, Falcon claimed an $8,000 deduction for the organizational expenses.What is Falcon's current E & P?

A)$200,000
B)$208,000
C)$250,000
D)$258,000
E)None of the above

Question 61

Navy Corporation has E & P of $240,000.It distributes land with a fair market value of $70,000 (adjusted basis of $25,000) to its sole shareholder, Troy.The land is subject to a liability of $55,000 that Troy assumes.Troy has:

A)A taxable dividend of $15,000.
B)A taxable dividend of $25,000.
C)A taxable dividend of $45,000.
D)A taxable dividend of $70,000.
E)A basis in the machinery of $55,000.

Question 62

Matching
Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
a.Increase
b.Decrease
c.No effect
Gain on installment sale in 2017 deferred until 2018.

Question 63

Matching
Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
a.Increase
b.Decrease
c.No effect
Loss on sale between related parties in 2017.

Question 64

Brett owns stock in Oriole Corporation (basis of $100,000) as an investment.Oriole distributes property (fair market value of $375,000; basis of $187,500) to him during the year.Oriole has current E & P of $25,000 (which includes the E & P gain on the property distribution), accumulated E & P of $100,000, and makes no other distributions during the year.What is Brett's capital gain on the distribution?

A)$0
B)$100,000
C)$150,000
D)$187,500
E)None of the above

Question 65

Puffin Corporation makes a property distribution to its sole shareholder, Bonnie.The property distributed is a car (basis of $30,000; fair market value of $20,000) that is subject to a $6,000 liability which Bonnie assumes.Puffin has no accumulated E & P and $30,000 of current E & P from other sources during the year.What is Puffin's E & P after taking into account the distribution of the car?

A)$4,000
B)$6,000
C)$10,000
D)$14,000
E)None of the above

Question 66

In the current year, Warbler Corporation (E & P of $250,000) made the following property distributions to its shareholders (all corporations): $$\begin{array} { l r r } & \text { Adjusted Basis } & \frac { \text { Fair Market } } { \text { Value } } \\\text { Fink Corporation stock (held for investment) } & \$ 150,000 & \$ 120,000 \\\text { Non-LIFO inventory } & 80,000 & 110,000\end{array}$$ ? Warbler Corporation is not a member of a controlled group.As a result of the distribution:

A)The shareholders have dividend income of $200,000.
B)The shareholders have dividend income of $260,000.
C)Warbler has a recognized gain of $30,000 and a recognized loss of $30,000.
D)Warbler has no recognized gain or loss.
E)None of the above.

Question 67

Matching
Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
a.Increase
b.Decrease
c.No effect
Meal and entertainment expenses not deducted in 2017 because of the 50% limitation.

Question 68

On January 1, Eagle Corporation (a calendar year taxpayer) has accumulated E & P of $300,000.During the year, Eagle incurs a net loss of $420,000 from operations that accrues ratably.On June 30, Eagle distributes $180,000 to Libby, its sole shareholder, who has a basis in her stock of $112,500.How much of the $180,000 is a dividend to Libby?

A)$0
B)$90,000
C)$112,500
D)$180,000
E)None of the above

Question 69

At the beginning of the current year, Doug and Alfred each own 50% of Amaryllis Corporation (a calendar year taxpayer).In July, Doug sold his stock to Kevin for $140,000.At the beginning of the year, Amaryllis Corporation had accumulated E & P of $240,000 and its current E & P is $280,000 (prior to any distributions).Amaryllis distributed $300,000 on February 15 ($150,000 to Doug and $150,000 to Alfred) and distributed another $300,000 on November 1 ($150,000 to Kevin and $150,000 to Alfred).Kevin has dividend income of:

A)$150,000.
B)$140,000.
C)$110,000.
D)$70,000.
E)None of the above.

Question 70

Which of the following statements regarding constructive dividends is not correct?

A)Constructive dividends do not need to be formally declared or designated as a dividend.
B)Constructive dividends need not be paid pro rata to the shareholders.
C)Corporations that receive constructive dividends may not use the dividends received deduction.
D)Constructive dividends are taxable as dividends only to the extent of earnings and profits.
E)All of the above.

Question 71

Starling Corporation has accumulated E & P of $60,000 on January 1, 2017.In 2017, Starling Corporation had an operating loss of $80,000.It distributed cash of $40,000 to Zoe, its sole shareholder, on December 31, 2017.Starling Corporation's balance in its E & P account as of January 1, 2018, is:

A)$60,000 deficit.
B)$20,000 deficit.
C)$0.
D)$60,000.
E)None of the above.

Question 72

Purple Corporation makes a property distribution to its sole shareholder, Paul.The property distributed is a house (fair market value of $189,000; basis of $154,000) that is subject to a $245,000 mortgage that Paul assumes.Before considering the consequences of the distribution, Purple's current E & P is $35,000 and its accumulated E & P is $140,000.Purple makes no other distributions during the current year.What is Purple's taxable gain on the distribution of the house?

A)$0
B)$21,000
C)$35,000
D)$91,000
E)None of the above

Question 73

Purple Corporation has accumulated E & P of $100,000 on January 1, 2017.In 2017, Purple has current E & P of $130,000 (before any distribution).On December 31, 2017, the corporation distributes $250,000 to its sole shareholder, Cindy (an individual).Purple Corporation's E & P as of January 1, 2018 is:

A)$0.
B)($20,000).
C)$100,000.
D)$130,000.
E)None of the above.

Question 74

Which one of the following statements about property distributions is false?

A)When the basis of distributed property is greater than its fair market value, a deficit may be created in E & P.
B)When the basis of distributed property is less than its fair market value, the distributing corporation recognizes gain.
C)When the basis of distributed property is greater than its fair market value, the distributing corporation does not recognize loss.
D)The amount of a distribution received by a shareholder is measured by using the property's fair market value.
E)All of the above statements are true.

Question 75

Matching
Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
a.Increase
b.Decrease
c.No effect
Federal income tax refunds from tax paid in prior years.

Question 76

Rust Corporation distributes property to its sole shareholder, Andre.The property has a fair market value of $350,000, an adjusted basis of $205,000, and is subject to a liability of $220,000.Current E & P is $500,000.With respect to the distribution, which of the following statements is correct?

A)Rust has a gain of $15,000 and Andre has dividend income of $350,000.
B)Rust has a gain of $145,000 and Andre's basis in the distributed property is $130,000.
C)Rust has a gain of $130,000 and Andre's basis in the distributed property is $350,000.
D)Rust has a gain of $145,000 and Andre has dividend income of $130,000.
E)None of the above.

Question 77

Ten years ago, Carrie purchased 2,000 shares of common stock in Osprey Corporation for $20,000.In the current year, Carrie receives a nontaxable stock dividend of 20 shares of Osprey preferred.Values at the time of the dividend are: $8,000 for the preferred stock and $72,000 for the common.Based on this information, Carrie's basis in the stock is:

A)$20,000 in the common and $8,000 in the preferred.
B)$2,000 in the common and $18,000 in the preferred.
C)$18,000 in the common and $2,000 in the preferred.
D)$19,802 in the common and $198 in the preferred.
E)None of the above.

Question 78

Matching
Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
a.Increase
b.Decrease
c.No effect
Cash dividends distributed to shareholders in 2017.

Question 79

Matching
Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
a.Increase
b.Decrease
c.No effect
Interest received from municipal bonds in 2017.

Question 80

Robin Corporation distributes furniture (basis of $40,000; fair market value of $50,000) as a property dividend to its shareholders.The furniture is subject to a liability of $55,000.Robin Corporation recognizes gain of:

A)$55,000.
B)$15,000.
C)$10,000.
D)$0.
E)None of the above.