Deck 5: Corporations: Earnings and Profits and Dividend Distributions

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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 6

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

Question 7

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

Question 8

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 9

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

Question 10

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 11

Nondeductible meal expense must be subtracted from taxable income to determine current E & P.

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

To determine current E & P, taxable income must be increased for any dividends received deduction.

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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 24

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 25

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 26

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

Question 27

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

Question 28

If a distribution of stock rights is taxable and their fair market value is less than 15 percent of the value of the old stock, then either a zero basis or a portion of the old stock basis may be assigned to the rights at the shareholder's option.

Question 29

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

Question 30

If stock rights are taxable, the recipient has income to the extent of the fair market value of the rights.

Question 31

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

Question 32

Certain dividends from foreign corporations can be qualified dividends for purposes of the preferential rate available to individuals.

Question 33

Dividends paid to shareholders who hold both long and short positions do not qualify for the reduced tax rate available to individuals in certain years.

Question 34

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 35

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 36

The rules used to determine the taxability of stock dividends also apply to distributions of stock rights.

Question 37

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

Question 38

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 39

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 40

Dividends taxed as ordinary income are considered investment income for purposes of the investment interest expense limitation.

Question 41

Stacey and Eva 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 Eva on May 1. If Parakeet's current E & P is $60,000, how much is allocated to Eva's distribution?

A) $5,000
B) $10,000
C) $18,000
D) $30,000
E) None of these.

Question 42

On January 2, 2019, 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, 2020, 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 these.

Question 43

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

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

Question 44

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

Question 45

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 these.

Question 46

Tangelo Corporation has an August 31 year-end. Tangelo had $50,000 in accumulated E & P at the beginning of its 2020 fiscal year September 1, 2019) and during the year, it incurred a $75,000 operating loss. It also distributed $65,000 to its sole shareholder, Cass, on November 30, 2019. If Cass is a calendar year taxpayer, how should she treat the distribution when she files her 2019 income tax return assuming the return is filed by April 15, 2020)?

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 these.

Question 47

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 and 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 and 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 these.

Question 48

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 these.

Question 49

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 these.

Question 50

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 these.

Question 51

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 these.

Question 52

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 these.

Question 53

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 these.

Question 54

Cedar Corporation is a calendar year taxpayer formed in 2015. Cedar's E & P before distributions for each of the past 5 years is listed below. $$\begin{array} { l l } 2019 & \$ 28,000 \\2018 & \$ 40,000 \\2017 & \$ 39,000 \\2016 & \$ 68,000 \\2015 & \$ 16,000\end{array}$$ Cedar Corporation made the following distributions in the previous 5 years. $\begin{array}{cl}2018 & \text { Land (basis of } \$ 70,000 \text {, fair market value of } \$ 80,000) \\2015 & \$ 20,000 \text { cash }\end{array}$ Cedar's accumulated E & P as of January 1, 2020 is:

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

Question 55

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 these.

Question 56

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 these.

Question 57

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 these.

Question 58

Tungsten Corporation, a calendar year cash basis taxpayer, made estimated tax payments of $800 each quarter in 2019, for a total of $3,200. Tungsten filed its 2019 tax return in 2020 and the return showed a tax liability $4,200. When it filed its tax return in 2020, 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 2019.
B) Increase by $1,000 in 2020.
C) Decrease by $1,000 in 2019.
D) Decrease by $1,000 in 2020.
E) None of these.

Question 59

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 these statements are incorrect.

Question 60

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 these.

Question 61

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 these statements are true.

Question 62

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 these.

Question 63

Starling Corporation has accumulated E & P of $60,000 on January 1, 2019. In 2019, Starling Corporation had an operating loss of $80,000. It distributed cash of $40,000 to Zoe, its sole shareholder, on December 31, 2019. Starling Corporation's balance in its E & P account as of January 1, 2020, is:

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

Question 64

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 these.

Question 65

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 these.

Question 66

Purple Corporation makes a property distribution to its sole shareholder, Kyung. 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 Kyung 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 these.

Question 67

Pink Corporation declares a nontaxable dividend payable in rights to subscribe to common stock. Each right entitles the holder to purchase one share of stock for $25. One right is issued for every two shares of stock owned. Jocelyn owns 100 shares of stock in Pink, which she purchased three years ago for $3,000. At the time of the distribution, the value of the stock is $45 per share and the value of the rights is $2 per share. Jocelyn receives 50 rights. She exercises 25 rights and sells the remaining 25 rights three months later for $2.50 per right.

A) Jocelyn must allocate a part of the basis of her original stock in Pink to the rights.
B) If Jocelyn does not allocate a part of the basis of her original stock to the rights, her basis in the new stock is zero.
C) Sale of the rights produces ordinary income to Jocelyn of $62.50.
D) If Jocelyn does not allocate a part of the basis of her original stock to the rights, her basis in the new stock is $625.
E) None of these.

Question 68

In the current year, Warbler Corporation E & P of $250,000) made the following property distributions to its shareholders all corporations): $\begin{array}{lrr} &&\text { Fair Market }\\& \text { Adjusted Basis } & \text { Value } \\\text { Pink Corporation stock (held for investment) } & \$ 150,000 & \$ 120,000 \\\text { Non-LIFO inventory } & 80,000 & 110,000\end{array}$ 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 these.

Question 69

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 these.

Question 70

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 these.

Question 71

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 these.

Question 72

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 these.

Question 73

Which one of the following statements is false?

A) Most countries that trade with the United States do not impose a double tax on dividends.
B) Tax proposals that include corporate integration would eliminate the double tax on dividends.
C) The double tax on dividends may make corporations more financially vulnerable during economic downturns.
D) Many of the arguments in support of the double tax on dividends relate to fairness.
E) None of these.

Question 74

Purple Corporation has accumulated E & P of $100,000 on January 1, 2019. In 2019, Purple has current E & P of $130,000 before any distribution). On December 31, 2019, the corporation distributes $250,000 to its sole shareholder, Cindy an individual). Purple Corporation's E & P as of January 1, 2020 is:

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

Question 75

On January 30, Juan receives a nontaxable distribution of stock rights from Platinum Corporation. Each right entitles the holder to purchase one share of stock for $40. One right is issued for every share of stock owned. Juan owns 100 shares of stock purchased two years ago for $4,000. At the date of distribution, the rights are worth $1,000 100 rights at $10 per right) and Juan's stock in Platinum is worth $5,000 or $50 per share). On December 1, Juan sells all 100 stock rights for $12 per right. How much gain does Juan recognize on the sale?

A) $1,200
B) $533
C) $400
D) $0
E) None of these.

Question 76

In June of the current year, Marigold Corporation declares a $4 dividend out of E & P on each share of common stock to shareholders of record on August 1. Ellen and Tim each purchase 100 shares of Marigold stock on July 1. On July 15, Ellen also purchases a short position in Marigold. Tim sells 50 of his shares on August 10 and continues to hold the remaining 50 shares through the end of the year. Ellen closes her short position in Marigold on October15. With respect to the dividends, which of the following is correct?

A) Ellen will have $400 of qualifying dividends subject to reduced tax rates and $400 of ordinary income from dividends paid on the short position of Marigold stock).
B) Tim will have $200 of qualifying dividends subject to reduced tax rates and $200 of ordinary income.
C) All $800 of Ellen's dividends will qualify for reduced tax rates.
D) All $400 of Tim's dividends will qualify for reduced tax rates.
E) None of these.

Question 77

Which of the following is not a consequence of the double tax on dividends?

A) Corporations have an incentive to retain earnings and structure distributions to avoid dividend treatment.
B) Corporations have an incentive to invest in noncorporate rather than corporate businesses.
C) The cost of capital for corporate investments is increased.
D) Corporations have an incentive to finance operations with debt rather than equity.
E) All of these are consequences of the double tax on dividends.

Question 78

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 these.

Question 79

At the beginning of the current year, both Doug and Amelia 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 Amelia) and distributed another $300,000 on November 1 $150,000 to Kevin and $150,000 to Amelia). Kevin has dividend income of:

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

Question 80

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.