Question 1

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 2

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 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

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 5

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 6

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 7

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 8

Identify which of the following statements is true.

Accepted Answer

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

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

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 11

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 12

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 13

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 14

How does a shareholder classify a distribution for tax purposes?

Accepted Answer

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

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 cannot be deducted for purposes of determining current E&P because it is an item that reduces taxable income, not an actual expenditure or deduction made in calculating taxable income.

Question 16

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 17

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

This statement is true. 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 tax code.

Question 18

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 19

Identify which of the following statements is false.

Accepted Answer

At formation, a corporation's E&P does not depend on the amount of capital contributed by the shareholders. It is determined based on the corporation's taxable income and deductible expenses.

Question 20

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

Accepted Answer

Corporate distributions that exceed earnings and profits can be characterized as dividends, but they may also be considered a return of capital or a capital gain, depending on various factors. Therefore, it is not always true that they are capital gains.

Quiz 4: Corporate Nonliquidating Distributions