Deck 4: Corporate Nonliquidating Distributions

Question 1

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?

A)$0
B)($10,000)
C)$10,000
D)none of the above

Answer 1

A

Question 2

A shareholder's basis in property distributed as a dividend is its fair market value.

Answer 2

True

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.

Answer 3

True

Question 4

Identify which of the following increases Earnings & Profits.

A)a capital contribution
B)life insurance proceeds payable to the spouse
C)tax-exempt interest income
D)All of the above increase E&P of a corporation.

Question 5

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

A)$0.
B)$7,000.
C)$5,000.
D)$12,000.

Question 6

Identify which of the following statements is true.

A)If both the current and accumulated E&P have deficit balances,a corporate distribution cannot be characterized as a dividend.
B)The shareholder's basis in property received in a nonliquidating distribution is the property's FMV reduced by liabilities assumed by the shareholder.
C)A corporation recognizes gain when distributing money as a dividend to its shareholders.
D)All of the above are false.

Question 7

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

A)charitable contribution in excess of the 10% limitation
B)capital losses in excess of capital gains
C)life insurance premiums (in excess of the increase in cash surrender value for the policy)paid on the lives of key employees
D)dividends-received deduction

Question 8

Corporations recognize gains and losses on the distribution of property to shareholders if the property's fair market value differs from its basis.

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

A)$4,100 dividend and a $6,900 capital gain.
B)$11,000 return of capital.
C)$4,100 dividend and a $6,900 tax free return of capital.
D)$8,000 dividend and a $3,000 return of capital.

Question 10

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

A)$0.
B)$8,600.
C)$43,000.
D)$100,000.

Question 11

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

Question 12

When appreciated property is distributed in a nonliquidating distribution,the net effect on the distributing corporation's E&P is that it is reduced by the FMV of the property distributed and increased by the gain (net of federal income taxes)recognized due to the property distribution.

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. $$\begin{array} { | l | r | } \hline \text { Date } & \text { Amount Distributed } \\\hline \text { April 1 } & \$ 20,000 \\\hline \text { Tune 1 } & 20,000 \\\hline \text { August 1 } & 15,000 \\\hline \text { November 1 } & 5,000 \\\hline\end{array}$$ The treatment of the $15,000 August 1 distribution would be

A)$15,000 is taxable as a dividend; $5,000 from current E&P and the balance from accumulated E&P.
B)$15,000 is taxable as a dividend from accumulated E&P.
C)$4,000 is taxable as a dividend from accumulated E&P,and $11,000 is tax-free as a return of capital.
D)$5,000 is taxable as a dividend from current E&P,and $10,000 is tax-free as a return of capital.

Question 14

Identify which of the following statements is false.

A)For E&P dividend distribution purposes,property as defined in Sec.317(a)includes money.
B)The function of E&P is to provide a measure of a corporation's economic ability to pay dividends.
C)At formation,a corporation's E&P depends on the amount of capital contributed by the shareholders.
D)Adjustments to taxable income when computing E&P do not include tax-exempt interest.

Question 15

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

Question 16

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

A)$1,500.
B)$3,000.
C)$14,000.
D)$15,000.

Question 17

Identify which of the following statements is true.

A)Section 179 property must be expensed ratably over a five-year period when computing E&P.
B)Losses on property sales to related parties are not deductible when computing E&P.
C)Distributions made out of accumulated E&P are allocated ratably between multiple distributions made during the tax year.
D)All of the above are false.

Question 18

Dixie Corporation distributes $31,000 to its sole shareholder,Sally.At the time of the distribution,Dixie's E&P is $25,000 and Sally's basis in her Dixie stock is $10,000.Sally's basis in her Dixie stock after the distribution is

A)$4,000.
B)$10,000.
C)$25,000.
D)$31,000.

Question 19

Current E&P does not include

A)tax-exempt interest income.
B)life insurance proceeds where the corporation is the beneficiary.
C)federal income tax refunds from prior years.
D)All of the above are included.

Question 20

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

A)$5,000.
B)$15,000.
C)$20,000.
D)$60,000.

Question 21

Wills Corporation,which has accumulated a current E&P totaling $70,000,distributes land to its sole shareholder,an individual.The land has an FMV of $75,000 and an adjusted basis of $60,000.The shareholder assumes a $15,000 liability associated with the land.The transaction will have the following tax consequences.

A)The corporation will recognize a $15,000 gain; the shareholder will recognize dividend income of $75,000.
B)The corporation will recognize no gain; the shareholder will recognize dividend income of $75,000.
C)The corporation will recognize a $15,000 gain; the shareholder will recognize dividend income of $60,000.
D)The corporation will recognize no gain; the shareholder will recognize dividend income of $60,000.

Question 22

What is a constructive dividend? Under what circumstances are constructive dividends most likely to arise?

Question 23

A corporation distributes land and the related liability to Meg,its sole shareholder.The land has an FMV of $60,000 and is subject to a liability of $70,000.The corporation has current and accumulated E&P of $80,000.The corporation's adjusted basis for the property is $70,000.What effect does the transaction have on the corporation?

A)A recognized loss of $10,000; its E&P is reduced by $70,000.
B)A recognized loss of $10,000; its E&P is unchanged.
C)No recognized gain or loss; its E&P is reduced by $60,000.
D)No recognized gain or loss; its E&P is unchanged by the distribution.

Question 24

Identify which of the following statements is true.

A)Loans made to shareholders in proportion to their stock ownership in the corporation is evidence that the loans are disguised dividends.
B)Corporate payments for the shareholder's benefit may be a taxable dividend.
C)If the shareholder can elect to receive distributing corporation stock or money,the receipt of distributing corporation stock will be a taxable dividend.
D)All of the above are true.

Question 25

Wills Corporation,which has accumulated a current E&P totaling $65,000,distributes land to its sole shareholder,an individual.The land has an FMV of $75,000 and an adjusted basis of $55,000.The shareholder assumes a $15,000 liability associated with the land.The shareholder will recognize

A)$60,000 of dividend income and have a $60,000 basis in the land.
B)$65,000 of dividend income and have a $75,000 basis in the land.
C)$60,000 of dividend income and have a $75,000 basis in the land.
D)$65,000 of dividend income and have a $65,000 basis in the land.

Question 26

Tia owns 2,000 shares of Bass Corporation common stock with an $80,000 basis.Bass distributes a nontaxable preferred stock dividend.When the preferred stock is distributed,it has an FMV of $60,000 and the FMV of the 2,000 common stock shares is $180,000.The basis of the preferred stock is

A)$0.
B)$20,000.
C)$60,000.
D)$80,000.

Question 27

Bruce receives 20 stock rights in a nontaxable distribution.The stock rights have an FMV of $5,000.The common stock with respect to which the rights are issued has a basis of $4,000 and an FMV of $120,000.Bruce allows the stock rights to lapse.He can deduct a loss of

A)$0.
B)$1,000.
C)$5,000.
D)none of the above

Question 28

The Sec.318 family attribution rules can be waived for purposes of the Sec.302(b)(3)complete termination rules even though the redeeming shareholder is a creditor of the corporation.

Question 29

Hogg Corporation distributes $30,000 to its sole shareholder,Ima.At the time of the distribution,Hogg's E&P is $14,000 and Ima's basis in her stock is $10,000.Ima's gain from this transaction is a

A)$6,000 capital gain.
B)$14,000 capital gain.
C)$20,000 capital gain.
D)$30,000 capital gain.

Question 30

One consequence of a property distribution by a corporation to a shareholder is that

A)the amount of the distribution is increased by any liability assumed by the shareholder.
B)the holding period of the distributed property includes the holding period of the distributing corporation.
C)the shareholder's basis in the distributed property is the same as the distributing corporation's basis.
D)any liabilities assumed by the shareholder do not reduce the shareholder's basis.

Question 31

Identify which of the following statements is false.

A)The distribution of stock rights will be taxable if the value of the stock rights is more than 15% of the value of the underlying stock.
B)The distribution of stock rights is generally tax free under Sec.305.
C)If the value of stock rights is less than 15% of the value of the underlying stock,the basis of the rights is zero unless the shareholder elects to allocate basis to the rights.
D)The holding period for stock rights includes the holding period for the underlying stock.

Question 32

In a taxable distribution of stock,the recipient shareholder takes a basis equal to the FMV of the stock received.

Question 33

Which of the following transactions does not have the potential of creating a constructive dividend?

A)compensation paid by a corporation to a shareholder-employee
B)purchase of corporate property by the shareholder
C)shareholder's rental of corporate property
D)All of the above can result in a constructive dividend.

Question 34

An individual shareholder owns 3,000 shares of Baxter Corporation common stock with a basis of $10 per share.She receives a nontaxable 5% stock dividend.The basis per share of the common stock after the stock dividend is

A)$9.00.
B)$9.50.
C)$9.52.
D)$10.00.

Question 35

Bat Corporation distributes stock rights with a $20,000 FMV to its common stock shareholders.The $20,000 value of the stock rights at the time of distribution is less than 15% of the value of the underlying stock.Which of the following statements is true?

A)A shareholder must allocate basis to the rights based on the relative FMVs of the stock and the rights.
B)A shareholder cannot allocate any basis to the rights.
C)The basis in the rights is zero unless a shareholder makes a valid election to allocate basis to the rights.
D)The holding period for the rights begins on the day the rights are distributed in all cases.

Question 36

In a nontaxable distribution of stock rights,when the value of the rights is less than 15% of the value of the stock with respect to which the rights were distributed,the basis of the rights is zero unless the shareholder elects to allocate stock basis to the rights.

Question 37

A stock redemption is always treated as if the shareholder sold his stock to the corporation.

Question 38

Identify which of the following statements is true.

A)The holding period for property received by a shareholder in a nonliquidating distribution begins on the day after the distribution.
B)When making a nonliquidating distribution,a corporation recognizes gains and losses.
C)When making a nonliquidating distribution,the corporation's E&P is reduced by the property's FMV even though the property's basis is greater than its FMV.
D)All of the above are false.

Question 39

A corporation distributes land and the related liability in a nonliquidating distribution to a shareholder.The land (a capital asset)has an adjusted basis of $70,000,an FMV of $100,000 and is subject to a mortgage of $120,000.The corporation must recognize

A)a $20,000 capital loss.
B)a $50,000 capital gain.
C)a $70,000 capital gain.
D)no gain or loss.

Question 40

Identify which of the following statements is true.

A)The FMV of an obligation is used to determine the E&P reduction when a corporation distributes the obligation to its shareholders.
B)When appreciated property is distributed to shareholders,E&P must be increased by any gain (net of taxes)recognized due to the property distribution.
C)When appreciated property is distributed in a nonliquidating distribution,the net effect on the distributing corporation's E&P is that it is reduced by the net of the FMV of the property distributed minus the gain (net of federal income taxes)recognized due to the property distribution.
D)Only B and C above are true.

Question 41

Joshua owns 100% of Steeler Corporation's stock.Joshua's basis in the stock is $8,000.Steeler Corporation has E&P of $40,000.If Steeler Corporation redeems 60% of Joshua's stock for $50,000,Joshua must report dividend income of

A)$0.
B)$8,000.
C)$40,000.
D)$50,000.

Question 42

Perch Corporation has made paint and paint brushes for the past ten years.Perch Corporation is owned equally by Arnold,an individual,and Acorn Corporation.Perch Corporation has $100,000 of accumulated and current E&P.Both Arnold and Acorn Corporation have a basis in their stock of $10,000.Perch Corporation discontinues the paint brush operation and distributes assets worth $10,000 each to Arnold and Acorn Corporation in redemption of 20% of their stock.Due to the distribution,Arnold and Acorn Corporation must report:

A) $$\begin{array} { | l | l | } \hline\text { Arnold } & \text { Acorn Corporation } \\\hline \$ 8,000 \text { capital gain } & \$ 8,000 \text { capital gain } \\\hline\end{array}$$
B) $$\begin{array} { | l | l | } \hline\text { Arnold } & \text { Acorn Corporation } \\\hline 88,000 \text { capital gain } & \$ 10,000 \text { dividend } \\\hline\end{array}$$
C) $$\begin{array} { | l | l | } \hline\text { Arnold } & \text { Acorn Corporation } \\\hline \$ 10,000 \text { dividend } & \$ 8,000 \text { capital gain } \\\hline\end{array}$$
D) $$\begin{array} { | l | l | } \hline \text { Arnold } & \text { Acorn Corporation } \\\hline 10,000 \text { dividend } & \$ 10,000 \text { dividend } \\\hline\end{array}$$

Question 43

Family Corporation,a corporation controlled by Buddy's family,redeems all of Buddy's stock.For the redemption to be treated as a sale,which one of the following conditions must be met?

A)Buddy cannot be a creditor of the corporation after the redemption.
B)Buddy cannot be an officer of the corporation after the redemption.
C)Buddy cannot acquire an interest,even by inheritance,for 10 years unless the bequest was made prior to the redemption.
D)Buddy must have purchased the redeemed stock from a person whose stock ownership would be attributed to Buddy.

Question 44

Identify which of the following statements is true.

A)Only stock included in the decedent's gross estate can be redeemed under the Sec.303 provisions.
B)If the stock redemption proceeds are used to pay either the estate's funeral and administrative expenses or death taxes,the redemption can qualify for capital gains treatment under Sec.303.
C)Usually,a stock redemption qualifying under Sec.303 as a redemption to pay death taxes will result in little or no gain to the redeeming shareholder.
D)All of the above are true.

Question 45

Identify which of the following statements is true.

A)The Sec.318 family attribution rules can be waived for purposes of the Sec.302(b)(3)complete termination rules even though the redeeming shareholder is a creditor of the corporation.
B)Waiver of the Sec.318 family attribution rules is permitted for all related party stock transactions.
C)For a redemption to be essentially equivalent to a dividend,the shareholder must not have control of the corporation immediately following the redemption.
D)All of the above are false.

Question 46

Identify which of the following statements is true.

A)Generally in a stock redemption,if the shareholder's ownership percentage is substantially reduced,the redemption is treated as a sale.
B)The family attribution rules of Sec.318 are as inclusive as the family attribution rules of Sec.267.
C)A 10% shareholder of a corporation is considered to own 10% of any stock that is owned by the corporation under the Sec.318 attribution rules.
D)All of the above are false.

Question 47

Blast Corporation manufactures purses and make-up kits.The corporation decides to quit manufacturing purses and distributes the assets associated with this division to its shareholders.The distribution of the these assets will be treated as a partial liquidation if

A)the corporation so elects.
B)the corporation discontinues the line of business and the transaction is "essentially equivalent to a dividend."
C)the distribution is made within 24 months of the adoption of a plan of liquidation and the transaction is "not essentially equivalent to a dividend."
D)the distribution is "not essentially equivalent to a dividend" and is made within the year a plan of liquidation is adopted or within the succeeding year.

Question 48

Identify which of the following statements is true.

A)Stock ownership attributed to a corporation from one of its shareholders cannot be attributed to another of the corporation's shareholders under the Sec.318 attribution rules.
B)Under the attribution rules relating to stock redemptions,a person who has an option to purchase stock is considered to own the stock.
C)A stock redemption that qualifies as substantially disproportionate is a safe harbor for capital gain treatment.
D)All of the above are true.

Question 49

Which of the following is not a reason for a stock redemption?

A)desire by remaining shareholders to retain control
B)desire by shareholders to reduce the corporate tax liability
C)Redemption of shares is a good corporate investment.
D)No outside market exists for the stock.

Question 50

Elijah owns 20% of Park Corporation's single class of stock.Elijah's basis in the stock is $8,000.Park's E&P is $28,000.If Park redeems all of Elijah's stock for $48,000,Elijah must report dividend income of

A)$0.
B)$28,000.
C)$40,000.
D)$48,000.

Question 51

Identify which of the following statements is true.

A)If a stock redemption is made by an estate following the decedent's death,the redemption may receive capital gains treatment only if the money is actually used to pay the death taxes.
B)Attribution rules do not apply to qualified Sec.303 stock redemptions.
C)The value of decedent's stock satisfies the Sec.303 minimum if it is less than 35% of the decedent's gross estate.
D)All of the above are false.

Question 52

What are the consequences of a stock redemption to the distributing corporation?

A)The corporation recognizes a gain or loss as if it had sold the distributed property for its FMV immediately before the redemption.
B)If the redemption is treated as a dividend,E&P is reduced in the same manner as for a regular dividend.
C)If the redemption is treated as a sale,only accumulated earnings and profits is reduced.
D)All of the above are correct.

Question 53

Identify which of the following statements is true.

A)To have a bona fide partial liquidation,a firm must continue to conduct a qualified trade or business,which it had conducted for a period of more than three years prior to the redemption.
B)To qualify as a partial liquidation,a distribution must result in a bona fide contraction of the corporate business at the corporate level.
C)A partial liquidation of a corporation must be pro rata.
D)All of the above are false.

Question 54

All of Sphere Corporation's single class of stock is owned by four unrelated individuals in the following manner: Zack 27%,Xu 24.33%,Yvonne 24.33%,and Win 24.33%.Some of Zack's stock holdings are redeemed by Sphere Corporation,resulting in Zack's interest being reduced to 22.27%.Xu,Yvonne,and Win owned equally the remaining 77.73% of the Sphere stock.How should the redemption of Zack's stock be treated by Zack?

A)dividend income
B)sale transaction
C)return of capital
D)some other treatment

Question 55

Which of the following requirements must be met for a redemption to be treated as substantially disproportionate?

A)The shareholder must own less than 50% of the outstanding stock (in terms of voting power)after the redemption.
B)After the redemption,the shareholder must own less than 80% of his percentage ownership of voting stock prior to the redemption.
C)After the redemption,the shareholder must own less than 80% of his percentage ownership of common stock (voting and nonvoting)prior to the redemption.
D)All of the above must be met.

Question 56

A partial liquidation of a corporation is treated as a dividend in the case of a corporate shareholder.

Question 57

The gross estate of a decedent contains $2,000,000 cash and 100% of Davis Corporation stock worth $600,000.Funeral and administrative expenses and state death taxes allowable as estate tax deductions amount to $400,000.The estate owes no other liabilities.The decedent's Davis stock can be

A)redeemed to the extent of the death taxes and the estate's funeral and administrative costs with sale or exchange treatment.
B)redeemed with dividend treatment.
C)redeemed in full with sale or exchange treatment only if the proceeds are used to pay the death taxes and funeral and administrative costs.
D)redeemed to the extent of the death taxes and the funeral and administrative costs with sale or exchange treatment only if the proceeds are used to pay the death taxes and funeral and administrative costs.

Question 58

Which of the following is not a condition that permits a stock redemption to be treated as a sale?

A)It provides funds for payment of income taxes.
B)It is not essentially equivalent to a dividend.
C)The redemption is substantially disproportionate.
D)The redemption completely terminates the shareholder's interest.

Question 59

Identify which of the following statements is true.

A)The distributing corporation's E&P must be reduced by the FMV of nontaxable stock rights distributed to shareholders.
B)A stock redemption can be used to withdraw some assets from a corporation prior to a sale of the business.
C)A shareholder can redeem part of his stock and recognize a capital gain if the corporation has only one shareholder.
D)All of the above are false.

Question 60

Identify which of the following statements is false.

A)A stock redemption is treated as a sale or exchange only if the shareholder's ownership of one particular class of stock is terminated.
B)An individual is not considered to own stock owned by a brother under the family attribution rules of Sec.318.
C)An individual is considered to own the stock owned by his parents,children,spouse,and grandchildren under the family attribution rules of Sec.318.
D)A person who has an option to purchase stock is considered to own the stock.

Question 61

Identify which of the following statements is false.

A)The rules for the recognition of a gain or loss by a corporation that distributes property in redemption of its stock are the same as the rules for property distributions that are not in redemption of stock.
B)Generally,little or no gain is recognized by the redeeming shareholder in a qualified Sec.303 redemption.
C)When a stock redemption is considered a sale of stock by the shareholder,the E&P of the redeeming corporation is reduced by the FMV of the property used to redeem the stock.
D)Under Sec.311,a corporation does not recognize a loss when it distributes property that has declined in value.

Question 62

Identify which of the following statements is true.

A)The distribution of preferred stock as a stock dividend will result in income or a taxable gain being recognized by the shareholder on the date of the distribution if the stock is Sec.306 stock.
B)Corporations without E&P can distribute preferred stock as a stock dividend that is Sec.306 stock.
C)Two corporations are considered to be brother-sister corporations for purposes of the Sec.304 redemption rules if one shareholder owns more than 50% of each corporation.
D)All of the above are false.

Question 63

Marie owns one-half of the stock of Starke Corporation and serves as its President.The remaining stock is owned by 10 investors,none of whom owns more than 10% of the outstanding shares.Marie entered a hedge agreement with the corporation three years ago about salary payments that are declared unreasonable compensation by the IRS.Two years ago,the Corporation paid Marie a salary and bonus of $500,000.The IRS subsequently held that $200,000 of the salary is unreasonable compensation.Last year,Starke Corporation and the IRS agreed that $150,000 of the compensation is,in fact,unreasonable.This year,the $150,000 is repaid by Marie to the corporation.How much of the $500,000 compensation was taxable to Marie when originally paid and how much is taxable in the current year?

A)The entire $500,000 is taxable to Marie in the year of receipt and $150,000 of the compensation is deductible by Marie last year.
B)Marie must amend the return of two years ago to adjust her taxable compensation to the agreed- upon reasonable amount.
C)The entire $500,000 is taxable to Marie in the year of receipt and $150,000 of the compensation is deductible by Marie this year.
D)Marie must not include the agreed-upon amount in her return since it is not deductible.

Question 64

Van owns all 1,000 shares of Valley Metal Corporation stock.The stock has a $100,000 FMV.Karen wants to purchase the stock from Van but has only $70,000.Valley Metal has ample cash,which is not needed for operations.Which of the following best qualifies for bootstrap redemption treatment and no constructive dividends to the purchaser?

A)Karen contracts to acquire all the stock of the corporation on an installment plan and then uses corporate funds to pay the installment obligations.
B)Karen buys 70 shares from Van for $70,000 and Van causes Valley Metal Corporation to redeem his remaining shares for $30,000.
C)Karen buys 70 shares from Van for $70,000 and then contracts to buy the remaining 30 shares from Van.She then causes Valley Metal Corporation to redeem Van's 30 shares.
D)Karen buys 70 shares from Van for $70,000 and obtains an option to purchase Van's remaining stock for $50,000.Karen then assigns the option to Valley Metal Corporation.The corporation subsequently exercises the option.

Question 65

Rose has a $20,000 basis in the 60% of the Parent Corporation stock that she owns.Parent Corporation owns a 70% interest in Child Corporation.Parent and Child have current and accumulated E&P balances of $25,000 and $40,000,respectively.In return for $15,000,Rose sells 10% of the Parent Corporation stock to Child Corporation.What is the impact of the transaction on Rose?

A)Rose will recognize a $5,000 capital gain.
B)Rose will be treated as having received a $15,000 dividend distribution from Child Corporation.
C)Rose will be treated as having sold stock to Parent Corporation and recognize a $15,000 capital gain.
D)Rose will be treated as having received a $15,000 dividend from Parent Corporation.

Question 66

What is a stock redemption? What are some of the reasons for making a stock redemption? Why are some redemptions treated as sales and others as dividends?

Question 67

Circle Corporation has 1,000 shares of common stock outstanding.Circle redeems 450 shares owned by Dennis for $75,000 in complete redemption of Dennis's interest.The redemption qualifies as a sale.When the redemption is made,Circle Corporation has $150,000 of current and accumulated E&P and paid-in capital of $50,000.The distribution reduces paid-in capital by

A)$67,500.
B)$22,500.
C)$7,500.
D)$0.

Question 68

Which of the following statements best describes a bootstrap acquisition?

A)The shareholder sells part of his or her stock to a purchaser and then the corporation redeems the original shareholder's remaining stock.
B)The shareholder sells his stock in exchange for cash and debt.
C)The shareholder exchanges his stock for stock of a different corporation.
D)none of the above

Question 69

Good Times Corporation has a $60,000 accumulated E&P balance at the beginning of the year and incurs a $100,000 deficit during the year.Because of its poor operating performance,Good Times pays only three of its usual $10,000 quarterly dividend payments to its sole shareholder: those ordinarily paid March 31,June 30,and September 30.How are the March 31,June 30,and September 30 payments of $10,000 treated?

A)dividend; dividend; return of capital
B)dividend; return of capital; return of capital
C)return of capital; dividend; dividend
D)return of capital; return of capital; dividend

Question 70

John owns 70% of the May Corporation stock and 60% of the June Corporation stock.John sells one-half of his interest in May Corporation to June Corporation for $45,000.The E&P accounts of May and June are $25,000 and $35,000,respectively.The result would be that

A)John has sold his stock and reports a capital gain or loss.
B)John has sold his stock and reports a capital gain but no loss.
C)the transaction is treated as a contribution to May's capital and a redemption of June stock.
D)the sale is recast as a dividend paid to John,first by June and then by May.

Question 71

Which of the following statements is not true about redemptions?

A)Redemptions of Sec.306 stock are generally treated as dividends to the shareholder.
B)A sale of stock from one controlled corporation to another controlled corporation is treated as a redemption.
C)Redemptions to pay death taxes are treated as dividends to the shareholder.
D)A distribution in redemption of stock is generally a dividend.

Question 72

Two corporations are considered to be brother-sister corporations for purposes of the Sec.304 redemption rules if one shareholder owns more than 50% of each corporation.

Question 73

Jack Corporation redeems 200 shares of its stock for $100,000 from Junior,who inherited the stock from his father,Ken.The stock's FMV on Ken's date of death was $90,000.Ken's basis in the stock was $40,000.Jack Corporation had an E&P balance of $300,000.If the redemption qualifies under Sec.303,Junior will

A)recognize a capital gain of $10,000.
B)recognize a capital gain of $60,000.
C)recognize $100,000 in dividend income.
D)recognize dividend income of $50,000 and a capital gain of $10,000.

Question 74

Boris owns 60 of the 100 shares outstanding of Bread Corporation stock and 80 of the 100 shares of Butter Corporation stock.His basis in the Bread shares is $10,000 and his basis in his Butter shares is $5,000.Boris sells 30 of his Bread Corporation shares to Butter Corporation for $25,000.Bread Corporation has E&P of $20,000 and Butter Corporation has E&P of $40,000.In applying the substantially disproportionate test to determine if this is a sale or a dividend,Boris is treated as owning how many shares of Bread after the sale?

A)30 shares
B)54 shares
C)60 shares
D)80 shares