Question 1

How does a shareholder classify a distribution for tax purposes?

Accepted Answer

Distributions are treated as follows: (1)dividends to the extent of corporate E&P, (2)return of capital to the extent of the shareholder's stock basis,and (3)gain from the sale of stock.

Question 2

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

Accepted Answer

Corporate distributions that exceed earnings and profits can be a return of capital, which is not a capital gain.

Question 3

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

Sarah and Matt must each recognize $80,000 (0.50 × $160,000)of dividend income.This portion of the distribution reduces Delta's E&P to zero.The additional $40,000 that each shareholder receives is treated as a return of capital or capital gain as summarized in the table below.

Question 4

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 when computing E&P.

Question 5

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 6

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

B)$55,000 of the distribution reduces E&P to $0,and $5,000 is a reduction in the basis of Harley's stock.

Question 7

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 $2,500 down payment this year and will pay Ho $2,500 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 8

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.  The treatment of the $15,000 August 1 distribution would be

Accepted Answer

D)
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Question 9

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

C)31 + 28 + 19 = 78; 78/365 × $18,250 = $3,900 reduction in accumulated E&P.
$8,000 - $3,900 loss accrued to distribution date = $4,100 E&P available for distribution.$6,900 ($11,000 - $4,100)balance of the distribution is a return of capital.

Question 10

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 11

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

A)Distributions cannot create an E&P deficit.

Question 12

Identify which of the following statements is true.

Accepted Answer

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

Question 13

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

The answer of In 2010,Tru Corporation deducted $5,000 of bad...

Question 14

Omega Corporation is formed in 2006.Its current E&P and distributions for each year through 2010 are as follows:
  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 15

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 allowed to corporations on dividends received from other corporations. It is not deductible in the year incurred for determining current E&P, as it is a deduction from taxable income rather than a deduction from E&P. A, B, and C are all deductions that are taken into account for E&P purposes.

Question 16

Current E&P does not include

Accepted Answer

All of the options mentioned are included in current E&P calculation as per the IRS regulations.

Question 17

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

B)Property expensed under Sec.179 is expensed ratably using the straight-line method over five years,commencing with the month in which it is deductible for Sec.179 purposes when computing E&P regardless of the number of years in its class life.
$15,000/5 yrs.= $3,000

Question 18

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

C)The entire gain on the installment sale must be used to increase E&P in the year of sale.

Question 19

Poppy Corporation was formed three years ago.Poppy's E&P history is as follows:  Poppy Corporation's accumulated E&P on January 1 will be

Accepted Answer

B)($6,000 - $4,000)+ ($5,000 - $1,000)+ $1,000 = $7,000

Question 20

Identify which of the following statements is false.

Accepted Answer

A corporation's E&P at formation is zero, as it has not yet generated any income or profits. E&P is calculated based on a corporation's earnings and profits from operations over time.

Quiz 4: Corporate Nonliquidating Distributions