Question 1

A distributionof cash from a corporation to a shareholder will always result in a dividend for tax purposes.

Accepted Answer

Not all cash distributions from a corporation to a shareholder are considered dividends for tax purposes; they can also be returns of capital or capital gains, depending on the corporation's earnings and profits and the shareholder's basis in the stock.

Question 2

Tammy owns 60 percent of the stock of Huron Corporation. Unrelated individuals own the remaining 40 percent. For a stock redemption of a portion of Tammy's shares to be treated as an exchange under the "substantially disproportionate" rule, the redemption must reduce Tammy's stock ownership in Huron Corporation below 48 percent.

Accepted Answer

According to the "substantially disproportionate" rule, the stock redemption must reduce Tammy's stock ownership below 50 percent, which in this case would be below 30 percent (since she owns 60 percent). However, the requirement is that her ownership be reduced below 48 percent, which is more stringent than the 50 percent threshold.

Question 3

Terrapin Corporation incurs federal income taxes of $250,000 in 20X3. Terrapin deducts the federal income taxes in computing its current E&P for 20X3.

Accepted Answer

Federal income taxes are deductible in calculating current E&P.

Question 4

Evergreen Corporation distributes land with a fair market value of $200,000 to its sole shareholder. Evergreen's tax basis in the land is $50,000. Evergreen will report a gain of $150,000 on the distribution regardless of whether its E&P is positive or negative.

Accepted Answer

The distribution of appreciated property by a corporation to its shareholder is treated as a taxable transaction, regardless of the corporation's E&P. The corporation will recognize a gain equal to the excess of the fair market value over the tax basis of the property distributed. In this case, the fair market value is $200,000 and the tax basis is $50,000, resulting in a gain of $150,000.

Question 5

Evergreen Corporation distributes land with a fair market value of $200,000 to its sole shareholder. Evergreen's tax basis in the land is $50,000. Assuming sufficient E&P, the amount of dividend reported by the shareholder is $200,000.

Accepted Answer

When a corporation distributes property, such as land, to a shareholder, the distribution is generally treated as a dividend to the extent of the corporation's earnings and profits (E&P). In this case, the fair market value of the land distributed is $200,000, which exceeds Evergreen's tax basis in the property of $50,000. Therefore, assuming sufficient E&P, the entire distribution would be treated as a dividend to the shareholder in the amount of $200,000.

Question 6

A distribution from a corporation to a shareholder will only be treated as a dividend for tax purposes if the distribution is paid out of current or accumulated E&P.

Accepted Answer

This is a fundamental principle of the tax treatment of corporate distributions. If a distribution is not paid out of E&P, it may be treated as a return of capital or a capital gain for tax purposes.

Question 7

Green Corporation has a deficitin current E&P of ($100,000) and positive accumulated E&P of $250,000. A $50,000 distribution from Green to its sole shareholder at year-end will be treated as a dividend.

Accepted Answer

The distribution will be considered a dividend to the extent of the corporation's current and accumulated earnings and profits, which in this case is $0 ($100,000 deficit in current E&P + $250,000 positive accumulated E&P = $150,000 available E&P). Therefore, the entire $50,000 distribution will be treated as a dividend.

Question 8

Big-gain Corporation distributes land with a fair market value of $220,000 to its sole shareholder. Big-gain's tax basis in the land is $115,000. Big-gain will not be taxed on a gain on the distribution if it has a deficit of ($250,000) in E&P.

Accepted Answer

The distribution of property (such as land) to a shareholder by a corporation will trigger a gain at the corporate level if the fair market value of the property exceeds the corporation's tax basis in the property, regardless of the corporation's current Earnings and Profits (E&P) status.

Question 9

The recipient of a tax-free stock distribution will have a zero tax basis in the stock received in the distribution.

Accepted Answer

The recipient's tax basis in the stock received in a tax-free stock distribution will be equal to the tax basis of the stock surrendered in the transaction.

Question 10

The term "E&P" iswell defined in the Internal Revenue Code.

Accepted Answer

The answer of The term "E&P" iswell defined in the...

Question 11

A corporation's "E&P" account is equal to the company's "retained earnings" account on itsfinancial balance sheet.

Accepted Answer

E&P (Earnings and Profits) is a tax concept used to determine a corporation's ability to pay dividends out of its profits, while retained earnings are an accounting concept reflecting the company's accumulated net income minus dividends paid to shareholders. E&P and retained earnings can differ due to differences in tax and financial accounting rules.

Question 12

This year the shareholders in Lucky Corporation can choose between receiving an additional 100 shares of stock or cash of $100. Lucky's shareholders will be taxed on the distribution if Lucky has sufficient E&P.

Accepted Answer

Shareholders will be taxed on the distribution if Lucky has sufficient E&P (earnings and profits).

Question 13

The recipient of a taxable stock distribution will have a tax basis in the stock equal to the fair market value of the stock received.

Accepted Answer

When a taxable stock distribution (such as a dividend or capital gain distribution) is received, the recipient's tax basis in the stock is equal to the fair market value of the stock received at the time of distribution. This is important for calculating any future gains or losses when the stock is sold.

Question 14

Stock distributions are always tax-free to the recipient shareholder.

Accepted Answer

While some stock distributions may be tax-free, such as stock dividends, others may result in taxable income to the recipient shareholder, such as stock grants or stock options. The type of distribution and the recipient's tax situation will determine if the distribution is tax-free or not.

Question 15

Cedar Corporation incurs a net capital loss of $20,000 in 20X3 that is carried forward to 20X4. However, Cedar will deduct the net capital loss in the computation of current E&P for 20X3.

Accepted Answer

According to the Internal Revenue Code, net capital losses can be carried forward to future years, but they must first be used to offset capital gains in the current year. However, when calculating a corporation's earnings and profits (E&P), net capital losses are treated differently. They are not deductible in the computation of E&P in the year they are incurred, but are instead deducted in the year they are recognized for tax purposes. Therefore, in this scenario, Cedar Corporation can carry forward the net capital loss of $20,000 to 20X4, but must deduct it in the computation of current E&P for 20X3.

Question 16

Evergreen Corporation distributes land with a fair market value of $50,000 to its sole shareholder. Evergreen's tax basis in the land is $200,000. Evergreen will deduct a tax loss of $150,000 on the distribution regardless of whether its E&P is positive or negative.

Accepted Answer

The distribution of property (like land) to a shareholder is generally treated as a sale at fair market value for tax purposes, and the loss on distribution of appreciated property is not deductible by the corporation. The corporation's E&P (Earnings and Profits) does not affect the deductibility of the loss.

Question 17

Green Corporation has current E&P of $100,000 and a deficit in accumulated E&P of ($200,000). A $50,000 distribution from Green to its sole shareholderat year-end will not be treated as a dividend because total E&P is a deficit ($100,000).

Accepted Answer

A distribution in excess of current and accumulated E&P is generally treated as a dividend, regardless of whether the total E&P is a deficit or not. In this case, since the distribution of $50,000 exceeds the current E&P, it will be treated as a dividend.

Question 18

A stock redemption is always treated as a sale or exchange for tax purposes.

Accepted Answer

A stock redemption may be treated as a sale or exchange for tax purposes, but it can also be treated as a dividend distribution, depending on the circumstances and specific tax rules applicable.

Question 19

Siblings are considered "family" under the stock attribution rules that apply to stock redemptions.

Accepted Answer

The answer of Siblings are considered "family" under the stock...

Question 20

Only taxable income and deductible expenses are included in the computation of current E&P.

Accepted Answer

The computation of current Earnings and Profits (E&P) includes not only taxable income and deductible expenses but also adjustments for items that are tax-exempt or not deductible for tax purposes, as well as differences between tax and financial accounting methods.

Quiz 7: Corporate Taxation: Non-Liquidating Distributions