Question 1

Grant Corporation sells land (a noninventory item)with a basis of $57,000 for $100,000.Nichole will be paid on an installment basis in five equal annual payments,starting in the current year.The E&P for the year of sale will be increased as a result of the sale (excluding federal income taxes)by

Accepted Answer

When a noninventory item is sold on an installment basis, the gain is recognized and included in E&P in proportion to the percentage of the installment payments actually received during the year. In this case, the gain is $43,000 ($100,000 - $57,000). Since the installment payments are made over five years, 20% of the gain will be included in E&P each year. Therefore, the increase in E&P for the year of sale will be $8,600 ($43,000 x 20%).

Question 2

In 2010,Tru Corporation deducted $5,000 of bad debts.It received no tax benefit from the deduction because it had an NOL in 2010 that it was unable to carry back or forward.In 2011,Tru recovered $4,000 of the amount due.
a)What amount must Tru include in income in 2011?
b)What effect does the $4,000 have on E&P in 2011,if any?

Accepted Answer

a)Tru excludes the $4,000 from gross income in 2011 because it received no tax benefit from the bad debt deduction in 2010.
b)Tru must add the $4,000 to its income for purposes of determining current E&P since it was deducted in a prior year.

Question 3

When computing E & P,Section 179 property must be expensed ratably over a five-year period,starting with the month in which it is expensed for Sec.179 purposes.

Accepted Answer

Section 179 property must be expensed ratably over a five-year period starting with the month in which it is expensed for Sec.179 purposes as per the IRS guidelines.

Question 4

Poppy Corporation was formed three years ago.Poppy's E&P history is as follows: $$\begin{array} { | c | c | c | } 
\hline \text { Year } & \text { Current E\&P } & \text { Distributions } \
\hline 2005 & \$ 6,000 & \$ 4,000 \
2006 & 5,000 & 1,000 \
2007 & 1,000 & 0 \
\hline
\end{array}$$ Poppy Corporation's accumulated E&P on January 1 will be

Accepted Answer

Poppy's accumulated E&P on January 1 is $7,000. This is calculated by adding the current E&P for each year and subtracting the distributions for each year.

Question 5

Current E&P does not include

Accepted Answer

All of the options listed (tax-exempt interest income, life insurance proceeds where the corporation is the beneficiary, and federal income tax refunds from prior years) are included in current E&P.

Question 6

Oreo Corporation has accumulated E&P of $8,000 at the beginning of the current year.During the year (a nonleap year),the corporation incurs a current E&P deficit of $18,250.The corporation distributes $11,000 on March 20th to Morris,its sole shareholder,who has a $9,000 basis for his stock.If the exact loss cannot be determined as of the date of distribution,the treatment of the distribution will be

Accepted Answer

Since the corporation started with an E&P of $8,000 and then incurred a deficit of $18,250, it has a negative E&P for the year. The distribution of $11,000 first applies against the positive beginning E&P, resulting in a $4,100 dividend. The remaining $6,900 reduces the shareholder's basis in the stock, but since the basis is $9,000, this portion is a tax-free return of capital, not a capital gain.

Question 7

Crossroads Corporation distributes $60,000 to its sole shareholder Harley.Crossroads has earnings and profits of $55,000 and Harley's basis in her stock is $20,000.After the distribution,Harley's basis is

Accepted Answer

When Harley receives the $60,000 distribution, she is treated as receiving a taxable dividend to the extent of Crossroads Corporation's current and accumulated earnings and profits. This means that $55,000 of the distribution is considered a taxable dividend. Since Harley's current stock basis is $20,000, only $20,000 of the distribution can be applied to reduce her stock basis. The remaining $35,000 of the distribution is treated as a capital gain. Therefore, Harley's new stock basis is $20,000 (original basis) - $20,000 (portion of distribution applied to reduce basis) + $35,000 (portion of distribution treated as a capital gain) = $15,000.

Question 8

How does a shareholder classify a distribution for tax purposes?

Accepted Answer

The answer of How does a shareholder classify a distribution...

Question 9

For purposes of determining current E&P,which of the following items cannot be deducted in the year incurred?

Accepted Answer

The dividends-received deduction is a deduction for dividends received by a corporation from other domestic corporations. It reduces taxable income and is not taken into account for the calculation of E&P. The other items listed are deductions that are taken into account for the calculation of E&P.

Question 10

Identify which of the following increases Earnings & Profits.

Accepted Answer

Tax-exempt interest income increases a corporation's Earnings and Profits (E&P) because it is income that is not subject to federal income tax but still increases the corporation's ability to pay dividends to its shareholders.

Question 11

In the current year,Ho Corporation sells land that has a $6,000 basis and a $10,000 FMV to Henry,an unrelated individual.Henry makes a $25,000 down payment this year and will pay Ho $25,000 per year for the next three years,plus interest on the unpaid balance at a rate acceptable to the IRS.Ho's realized gain is $4,000.Since Ho is not in the business of selling land,it will use the installment method of accounting.How does this transaction affect Ho's E&P in the current year and the three subsequent years?

Accepted Answer

The answer of In the current year,Ho Corporation sells land...

Question 12

Omega Corporation is formed in 2006.Its current E&P and distributions for each year through 2010 are as follows:
 $\begin{array}{lll}
\text { Year }&\text { Current E\&P (deficit) }&\text { Distributions }\
2007 & \$(20,000) & 0 \
2008 & 30,000 & 0 \
2009 & 36,000 & \$ 18,000 \
2010 & 16,000 & 0
\end{array}$ Is the distribution made from current or accumulated E&P? At the beginning of 2011,what is accumulated E&P?

Accepted Answer

The answer of Omega Corporation is formed in 2006.Its current...

Question 13

Exit Corporation has accumulated E&P of $24,000 at the beginning of the current tax year.Current E&P is $20,000.During the year,the corporation makes the following distributions to its sole shareholder who has a $22,000 basis for her stock. $$\begin{array} { | l | r | } 
\hline \text { Date } & \text { Amount Distributed } \
\hline \text { April 1 } & \$ 20,000 \
\hline \text { Iune 1 } & 20,000 \
\hline \text { August 1 } & 15,000 \
\hline \text { November 1 } & 5,000 \
\hline
\end{array}$$ The treatment of the $15,000 August 1 distribution would be

Accepted Answer

The answer of Exit Corporation has accumulated E&P of $24,000...

Question 14

On April 1,Delta Corporation distributes $120,000 in cash to each of its two equal shareholders,Sarah and Matt.At the time of the distribution,Delta's E&P is $160,000.Sarah's basis in her stock is $50,000 and Matt's basis in his stock is $20,000.How are the distributions characterized to Sarah and Matt? Be specific.

Accepted Answer

The answer of On April 1,Delta Corporation distributes $120,000 in...

Question 15

Corporate distributions that exceed earnings and profits are always capital gains.

Accepted Answer

Corporate distributions that exceed earnings and profits can also be treated as return of capital or even as ordinary income. It depends on various factors such as the company's legal structure, the shareholder's basis in the stock, and the purpose of the distribution.

Question 16

Corporations may always use retained earnings as a substitute for earnings and profits.

Accepted Answer

Retained earnings and earnings and profits (E&P) are distinct concepts in corporate finance and tax accounting. Retained earnings refer to the cumulative amount of net income left over for the business after it has paid out dividends to its shareholders. Earnings and profits, on the other hand, is a tax concept used to determine whether a distribution to shareholders is considered a dividend. While retained earnings can influence E&P, they are not always interchangeable, as E&P calculations include adjustments for tax purposes that are not reflected in retained earnings.

Question 17

Identify which of the following statements is false.

Accepted Answer

A corporation's initial E&P is zero and does not depend on the amount of capital contributed by the shareholders. E&P is calculated based on the corporation's taxable income and adjustments to that income as specified in the Internal Revenue Code.

Question 18

Tomika Corporation has current and accumulated earnings and profits of $0.Tomika distributes $10,000 to its sole shareholder,Alana.What are Tomika's earnings and profits after the distribution?

Accepted Answer

Since Tomika Corporation currently has $0 in earnings and profits, there is no amount to reduce after distributing $10,000 to the shareholder. Therefore, the earnings and profits remain at $0.

Question 19

Boxer Corporation buys equipment in January of the current year with a seven-year class life for $15,000.The corporation expensed the $15,000 under Sec.179.The deduction in the year of purchase for E&P purposes due to the acquisition and expensing of the equipment is

Accepted Answer

The deduction for E&P purposes is the lesser of the Sec.179 expense deduction ($15,000) or the taxable income before the deduction ($30,000). Therefore, the deduction in the year of purchase for E&P purposes is $15,000.

Question 20

Identify which of the following statements is true.

Accepted Answer

The answer of Identify which of the following statements is...

Quiz 4: Corporate Nonliquidating Distributions

Grant Corporation sells land (a noninventory item) with a basis of $57,000 for $100,000.Nichole will be paid on an installment basis in five equal annual payments,starting in the current year.The E&P for the year of sale will be increased as a result of the sale (excluding federal income taxes) by