Question 1

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 treated as a sale at fair market value for tax purposes. Evergreen Corporation would recognize a loss of $150,000 ($50,000 FMV - $200,000 basis) for financial accounting purposes. However, for tax purposes, losses on distributions of property to shareholders are not deductible. The corporation's Earnings and Profits (E&P) do not affect the deductibility of the loss in this context.

Question 2

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 stock distribution is taxable, the recipient's tax basis in the stock received is equal to its fair market value at the time of distribution. This is because the value of the stock is considered taxable income to the recipient.

Question 3

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 known as the E&P requirement for dividends. If a distribution is paid out of other sources such as the corporation's capital, it may be considered a return of capital or a capital gain, rather than a dividend, for tax purposes.

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. Assuming sufficient E&P, the amount of dividend reported by the shareholder is $200,000.

Accepted Answer

When a corporation distributes appreciated property to its shareholder(s), the distribution is treated as a dividend to the extent of the corporation's E&P. The amount of the dividend is equal to the fair market value of the property distributed. In this case, since the fair market value of the land is $200,000, and there is sufficient E&P to support the distribution, the amount of dividend reported by the shareholder would also be $200,000. The shareholder's basis in the land would be its fair market value of $200,000, rather than the corporation's tax basis of $50,000. When a corporation distributes appreciated property to its shareholder, it is treated as a dividend to the extent of the corporation's earnings and profits (E&P). In this case, Evergreen Corporation distributed land with a fair market value of $200,000, which exceeds its tax basis of $50,000, resulting in a $150,000 appreciation. Therefore, if Evergreen Corporation has sufficient E&P, the distribution will be treated as a dividend in the amount of $200,000.

Question 5

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

Since Green Corporation has a deficit in current E&P, any distribution to the shareholder would first be deemed as a return of capital until the deficit in current E&P is completely eliminated. Therefore, the $50,000 distribution would not be treated as a dividend, but rather as a return of capital.

Question 6

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 7

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 8

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

According to the rules of IRC Section 301, distributions to shareholders are treated as dividends to the extent of the corporation's current and accumulated E&P. Since Green Corporation has a deficit in accumulated E&P of ($200,000), the distribution will be treated as a dividend to the extent of the corporation's current E&P of $100,000. Therefore, $50,000 of the distribution will be treated as a dividend and subject to taxation.

Question 9

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

When a corporation distributes property with a fair market value that exceeds its tax basis, the corporation must recognize gain equal to the difference between the fair market value and tax basis. In this case, the gain would be $150,000 ($200,000 FMV - $50,000 tax basis). This gain is recognized regardless of the corporation's E&P.

Question 10

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

Accepted Answer

When a tax-free stock distribution is received, the recipient's tax basis in the distributed stock is equal to the tax basis of the stock they owned before the distribution. Therefore, the recipient will have a zero tax basis only if they did not own any of the distributing company's stock before the distribution. If the recipient owned some of the stock before the distribution, their tax basis in the distributed stock will be the same as their tax basis in the stock they owned before the distribution. When a tax-free stock distribution is received, the recipient's tax basis in the stock received is equal to the tax basis of the stock surrendered in the distribution. Therefore, if the stock surrendered had a zero tax basis (for example, if it was received as a gift), then the stock received in the distribution would also have a zero tax basis.

Question 11

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

The "substantially disproportionate" rule requires that the shareholder's ownership be reduced below 50 percent minus one share, which in this case is 48 percent. Therefore, the statement is true.

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 only if Lucky Corporation has sufficient earnings and profits (E&P) to cover the distribution. This is because distributions from E&P are considered dividends, which are taxable to the shareholders, while distributions from other sources like capital surplus are not taxable to the shareholders. Therefore, it is important to consider the tax implications of the distribution before making a choice between receiving additional shares or cash.

Question 13

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

Net capital losses can be deducted in the computation of current E&P even if they are carried forward to future years for tax purposes. According to the Internal Revenue Code, net capital losses must be deducted in the computation of current E&P for the year in which they are incurred. Therefore, Cedar Corporation will deduct the net capital loss of $20,000 in the computation of its 20X3 E&P, but it can carry forward the unused portion to apply against future capital gains in subsequent years.

Question 14

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

According to the rules of section 311(b)(1) of the Internal Revenue Code, if the distributing corporation has a deficit in E&P, it may distribute appreciated property to shareholders without recognizing any gain on the distribution. In this case, since Big-gain Corporation has a deficit of ($250,000) in E&P, it will not be taxed on the gain from the distribution of the land. Since Big-gain Corporation has a deficit of ($250,000) in E&P, they will not be taxed on the gain on the distribution of the land.

Question 15

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

Accepted Answer

The E&P (Earnings and Profits) account is a tax concept, whereas the retained earnings account is a financial accounting concept. However, for financial statement purposes, they are essentially the same and are both included in the equity section of a company's balance sheet. The earnings and profits (E&P) of a corporation represent the cumulative amount of profits that have not been distributed as dividends or capital gains to shareholders. This is equivalent to the retained earnings account on the company's balance sheet, which shows the total net income that the company has reinvested in the business after paying dividends or making other distributions to shareholders.

Question 16

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 17

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

Accepted Answer

Stock distributions may or may not be tax-free to the recipient shareholder depending on the circumstances. For example, if the stock distribution is a dividend, the recipient shareholder will typically have to pay taxes on the distribution. However, if the distribution is a stock split, the value of the shareholder's investment will be distributed over a greater number of shares, but there will be no taxable event. Stock distributions can be either taxable or tax-free to the recipient shareholder depending upon the type of distribution. For example, a stock dividend is generally tax-free, whereas a distribution made as a result of a stock sale or merger may be taxable. Therefore, stock distributions are not always tax-free.

Question 18

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

Accepted Answer

When a shareholder's stock is redeemed by the company, the transaction is treated as a sale or exchange of the shares for tax purposes. The shareholder may recognize a capital gain or loss on the redemption depending on the amount received compared to their basis in the shares. When a stock redemption occurs, the shareholder is considered to have sold or exchanged their shares back to the company. As a result, this transaction is always treated as a sale or exchange for tax purposes.

Question 19

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

Accepted Answer

Current E&P (Earnings and Profits) is based on the corporation's taxable income, which includes all income subject to tax and deductible expenses. Non-taxable income and non-deductible expenses are not included in the computation of current E&P. This is because current E&P is based on the taxable income and deductible expenses of the corporation for the year, which is then adjusted for certain items such as tax-exempt income and non-deductible expenses.

Question 20

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 computing current E&P. Current E&P is calculated before deducting federal income taxes, but for tax purposes, federal income taxes are deductible. Therefore, Terrapin Corporation can deduct the federal income taxes in computing its current E&P for 20X3.

Quiz 7: Corporate Taxation: Non-Liquidating Distributions