Deck 19: Corporations: Distributions Not in Complete Liquidation

Question 1

When computing E & P,an adjustment to taxable income is necessary for any domestic production activities deduction.

Answer 1

True

Question 2

Of the § 179 expense deducted in the current year,80% must be added to this year's taxable income to determine current E & P.

Answer 2

True

Question 3

When a corporation makes an installment sale,for E & P purposes the realized gain is recognized as payments are received.

Answer 3

False

Question 4

The terms "earnings and profits" and "retained earnings" are identical in meaning.

Question 5

A realized gain from a like-kind exchange under § 1031 that is not recognized for income tax purposes has no effect on E & P.

Question 6

To determine E & P,some (but not all)previously excluded income items are added back to taxable income.

Question 7

Federal income tax paid in the current year must be added back to taxable income to determine E & P.

Question 8

Any loss in current E & P must be treated as occurring ratably during the year.

Question 9

Distributions by a corporation to its shareholders are presumed to be a return of capital unless the parties can prove otherwise.

Question 10

A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation's E & P.

Question 11

Use of MACRS cost recovery when computing taxable income requires an E & P adjustment.

Question 12

The dividends received deduction is added back to taxable income to determine E & P.

Question 13

Dividends are always taxed as ordinary income.

Question 14

Cash distributions received from a corporation with a deficit balance in accumulated E & P at the beginning of the year will not be taxed as dividend income.

Question 15

Nondeductible meal and entertainment expenses must be subtracted from taxable income to determine current E & P.

Question 16

In the current year,Pink Corporation has a § 179 expense of $80,000.As a result,next year,taxable income must be decreased by $16,000 to determine current E & P.

Question 17

Distributions that are not dividends are a return of capital and cause the shareholder's capital account to increase.

Question 18

When computing current E & P,taxable income is not adjusted for the deferred gain in a § 1033 involuntary conversion.

Question 19

A distribution in excess of E & P is treated as capital gain by shareholders.

Question 20

A corporation borrows money to purchase State of Texas bonds.The interest on the loan has an impact on both taxable income and current E & P.

Question 21

Corporate distributions are presumed to be paid out of E & P and are treated as dividends unless the parties to the transaction can show otherwise.

Question 22

Regardless of any deficit in accumulated E & P,distributions during the year are treated as dividends to the extent of current E & P.

Question 23

If a distribution of stock rights is taxable and their fair market value is less than 15 percent of the value of the old stock,then either a zero basis or a portion of the old stock basis may be assigned to the rights,at the shareholder's option.

Question 24

A constructive dividend must satisfy the legal requirements of a dividend as set forth by applicable state law.

Question 25

Property distributed by a corporation as a dividend is subject to a liability in excess of its basis.For purposes of determining gain on the distribution,the basis of the property is treated as being not less than the amount of liability.

Question 26

When current E & P has a deficit and accumulated E & P is positive,the two accounts are netted at the date of the distribution.If a positive balance results,the distribution is treated as a return of capital.

Question 27

The amount of dividend income recognized by a shareholder from a property distribution is always reduced by the amount of liabilities assumed by the shareholder.

Question 28

A corporation that distributes a property dividend must reduce its E & P by the fair market value of the property less any liability on the property.

Question 29

The rules used to determine the taxability of stock dividends also apply to distributions of stock rights.

Question 30

All dividends received by individual shareholders are subject to either a 15% or a 0% tax rate.

Question 31

In general,a nonqualified stock redemption is denied sale or exchange treatment because the shareholder's ownership interest in the corporation is not sufficiently diminished as result of the redemption.

Question 32

A corporate shareholder that receives a constructive dividend cannot apply a dividends received deduction to the distribution.

Question 33

During the year,White Corporation distributes land to its sole shareholder.If the fair market value of the land is more than its adjusted basis,White will not recognize gain on the distribution.

Question 34

When current E & P is positive and accumulated E & P has a deficit balance,the two accounts are netted for dividend determination purposes.

Question 35

Dividends from foreign corporations are not qualified dividends.

Question 36

Constructive dividends have no effect on a distributing corporation's E & P.

Question 37

Dividends taxed at a 15% rate are not considered investment income for purposes of the investment interest expense limitation.

Question 38

If stock rights are taxable,the recipient has income to the extent of the fair market value of the rights.

Question 39

Under no circumstances can a distribution generate (or add to)a deficit in E & P.

Question 40

If a stock dividend is taxable,the shareholder's basis of the newly received shares is determined by reallocating the basis of the previously owned stock.

Question 41

All of the stock in Robin Corporation (E & P of $800,000)is held by three unrelated individuals as follows: Shontelle has 300 shares,Marta has 200 shares,and Diego owns 500 shares.Robin Corporation redeems 200 of Diego's shares (basis of $10,000)for $40,000.If Diego's stock is a capital asset that has been held for the requisite holding period,he has a long-term capital gain of $30,000.

Question 42

The tax treatment of corporate distributions at the shareholder level does not depend on:

A)The basis of stock in the hands of the shareholder.
B)The earnings and profits of the corporation.
C)The character of the property being distributed.
D)Whether the distributed property is received by an individual or a corporation.
E)None of the above.

Question 43

Bluebird Corporation's 1,000 shares outstanding are owned as follows: Lucinda,350 shares;Carl (Lucinda's father),300 shares;and Nancy (Lucinda's sister),350 shares.During the current year,Bluebird (E & P of $800,000)redeemed 200 shares of Lucinda's stock for $50,000.If Lucinda had acquired the 200 shares five years ago for $10,000,she will have a long-term capital gain of $40,000 from the redemption.

Question 44

In a redemption to pay death taxes,stock in corporations in which the decedent held a 20% or more interest is treated as stock in a single corporation for purposes of determining whether the value of stock owned by the decedent exceeds 35% of the value of the decedent's adjusted gross estate.

Question 45

Grackle Corporation (E & P of $900,000)distributes cash of $100,000 and land (fair market value of $500,000;basis of $410,000)to a shareholder in a qualifying stock redemption.The land distributed is subject to a mortgage of $550,000.Grackle will recognize a gain of $140,000 as a result of the distribution.

Question 46

Reginald and Roland (Reginald's son)each own 50% of the stock of Robin Corporation.Reginald's stock interest is entirely redeemed by Robin Corporation.Two years later,Reginald loans Robin Corporation $250,000.The loan to Robin Corporation constitutes a prohibited interest for purposes of the family attribution waiver.

Question 47

Red Corporation,a calendar year taxpayer,has taxable income of $600,000.Among its transactions for the year are the following: Disregarding any provision for Federal income taxes,Red Corporation's current E & P is:

A)$565,000.
B)$575,000.
C)$580,000.
D)$650,000.
E)None of the above.

Question 48

For a stock redemption to qualify for sale or exchange treatment under § 303 (redemption to pay death taxes),it need not satisfy any of the § 302 redemption provisions.

Question 49

In applying the stock attribution rules to a stock redemption,stock owned by a 50% or more shareholder of a corporation is deemed to be owned in full by the corporation.

Question 50

Blue Corporation,a cash basis taxpayer,has taxable income of $700,000 for the current year.Blue elected $80,000 of § 179 expense.It also had a related party loss of $30,000 and a realized (not recognized)gain from an involuntary conversion of $85,000.It paid Federal income tax of $185,000 and a nondeductible fine of $20,000.Blue's current E & P is:

A)$465,000.
B)$529,000.
C)$614,000.
D)$630,000.
E)None of the above.

Question 51

Betty's adjusted gross estate is $7 million.The death taxes and funeral and administration expenses of her estate total $800,000.Included in Betty's gross estate is stock in Heron Corporation,valued at $2.1 million as of the date of her death in 2009.Betty had acquired the stock six years ago at a cost of $410,000.If Heron Corporation redeems $800,000 of Heron stock from the estate,the transaction will qualify under § 303 as a redemption to pay death taxes and receive sale or exchange treatment.

Question 52

Noncorporate shareholders generally prefer a nonqualified stock redemption over a qualifying stock redemption due to the availability of the dividends received deduction.

Question 53

At a time when Blackbird Corporation had E & P of $950,000 and 1,000 shares of stock outstanding,the corporation distributed $250,000 to redeem 300 shares of its stock.The transaction qualified as a disproportionate redemption for the shareholder.Blackbird's E & P is reduced by $285,000 as a result of the distribution.

Question 54

A shareholder's holding period of property acquired in a stock redemption includes that of the distributing corporation.

Question 55

Sally and her brother are the sole shareholders of Owl Corporation.During the current year,Owl distributes cash in redemption of all of Sally's stock.Sally continues to be employed as controller for Owl after the redemption.The distribution is a complete termination redemption resulting in sale or exchange treatment for Sally.

Question 56

A shareholder's holding period of property acquired in a stock redemption includes that of the distributing corporation.

Question 57

In a not essentially equivalent redemption [§ 302(b)(1)],the family attribution rules of § 318 apply.

Question 58

Beige Corporation (a calendar year taxpayer)has taxable income of $150,000,and its financial records reflect the following for the year. Beige Corporation's current E & P is:

A)$68,000.
B)$77,000.
C)$103,000.
D)$107,000.
E)None of the above.

Question 59

In applying the stock attribution rules to a stock redemption,a shareholder is treated as owning the stock of the following family members: spouses,children,grandchildren,siblings,and parents.

Question 60

In 2007,Floyd carried out a successful complete termination redemption of his stock in Gray Corporation.Floyd was able to qualify the transaction as a complete termination redemption only by use of the family attribution waiver.In 2010,Floyd receives stock in Gray Corporation as a gift from his father.Floyd has acquired a prohibited interest within the 10-year postredemption period and,as a result,the 2007 redemption no longer qualifies as a complete termination redemption.

Question 61

As of January 1,Warbler Corporation has a deficit in accumulated E & P of $150,000.For the year,current E & P (accrued ratably)is $260,000 (prior to any distributions).On July 1,Warbler Corporation distributes $295,000 to its sole shareholder.The amount of the distribution that is a dividend is:

A)$10,000.
B)$110,000.
C)$260,000.
D)$295,000.
E)None of the above.

Question 62

During the current year,Gander Corporation sold equipment for $250,000 (adjusted basis of $130,000).The equipment was purchased a few years ago for $280,000 and $150,000 in MACRS deductions have been claimed.ADS depreciation would have been $100,000.As a result of the sale,the adjustment to taxable income needed to determine E & P is:

A)No adjustment is required.
B)Add $50,000.
C)Subtract $50,000.
D)Add $40,000.
E)None of the above.

Question 63

Glenda is the sole shareholder of Condor Corporation.She sold her stock to Melissa on October 31 for $150,000.Glenda's basis in Condor stock was $50,000 at the start of the year.Condor distributed land to Glenda immediately before the sale.Condor's basis in the land was $20,000 (fair market value of $25,000).On December 31,Melissa received a $75,000 cash distribution from Condor.During the year,Condor has $20,000 of current E & P and its accumulated E & P balance on January 1 is $10,000.Which of the following statements is true?

A)Glenda recognizes a $110,000 gain on the sale of her stock.
B)Glenda recognizes a $100,000 gain on the sale of her stock.
C)Melissa receives $5,000 of dividend income.
D)Glenda receives $20,000 of dividend income.
E)None of the above.

Question 64

Maria and Christopher each own 50% of Cockatoo Corporation,a calendar year taxpayer.Distributions from Cockatoo are: $750,000 to Maria on April 1 and $250,000 to Christopher on May 1.Cockatoo's current E & P is $300,000 and its accumulated E & P is $600,000.How much of the accumulated E & P is allocated to Christopher's distribution?

A)$0.
B)$75,000.
C)$150,000.
D)$300,000.
E)None of the above.

Question 65

Pheasant Corporation ended its first year of operations with taxable income of $225,000.At the time of Pheasant's formation,it incurred $50,000 of organizational expenses.In calculating its taxable income for the year,Pheasant claimed an $8,000 deduction for the organizational expenses.What is Pheasant's current E & P?

A)$175,000.
B)$183,000.
C)$225,000.
D)$233,000.
E)None of the above.

Question 66

Stacey and Andrew each own one-half of the stock in Parakeet Corporation,a calendar year taxpayer.Cash distributions from Parakeet are: $350,000 to Stacey on April 1 and $150,000 to Andrew on May 1.If Parakeet's current E & P is $60,000,how much is allocated to Andrew's distribution?

A)$5,000.
B)$10,000.
C)$18,000.
D)$30,000.
E)None of the above.

Question 67

At the beginning of the current year,Dan and Andy each own 50% of Swallow Corporation.In July,Dan sold his stock to Kim for $140,000.At the beginning of the year,Swallow Corporation had accumulated E & P of $240,000 and its current E & P is $280,000 (prior to any distributions).Swallow distributed $300,000 on March 10 ($150,000 to Dan and $150,000 to Andy)and distributed another $300,000 on October 1 ($150,000 to Kim and $150,000 to Andy).Kim has dividend income of:

A)$70,000.
B)$110,000.
C)$140,000.
D)$150,000.
E)None of the above.

Question 68

Tracy and Lance,equal shareholders in Macaw Corporation,receive $250,000 each in distributions on December 31 of the current year.During the current year,Macaw sold an appreciated asset for $500,000 (basis of $150,000).Payment for the sale of the asset will be made as follows: 50% next year and 50% in the following year,with interest payable at a rate of 7.5%.Before considering the effect of the asset sale,Macaw's current year E & P is $400,000 and it has no accumulated E & P.How much of Tracy's distribution will be taxed as a dividend?

A)$0.
B)$200,000.
C)$250,000.
D)$425,000.
E)None of the above.

Question 69

Mallard Corporation is a calendar year taxpayer formed in 20019- Mallard's E & P for each of the past 5 years is listed below. 2009 $140,000
2008 $200,000
2007 $195,000
2006 $340,000
2005 $ 80,000
Mallard Corporation made the following distributions in the previous 5 years.
2008 Land (basis of $350,000,fair market value of $400,000)
2005 $100,000 cash
Mallard's accumulated E & P as of January 1,2010 is:

A)$455,000.
B)$475,000.
C)$505,000.
D)$525,000.
E)None of the above.

Question 70

Yellow Corporation has a deficit in accumulated E & P of $600,000 and has current E & P of $450,000.On July 1,Yellow distributes $500,000 to its sole shareholder,Eugene,who has a basis in his stock of $105,000.As a result of the distribution,Eugene has:

A)Dividend income of $450,000 and no adjustment to stock basis.
B)Dividend income of $105,000 and reduces his stock basis to zero.
C)Dividend income of $450,000 and reduces his stock basis to $55,000.
D)No dividend income,reduces his stock basis to zero,and has a capital gain of $500,000.
E)None of the above.

Question 71

Mulberry Corporation has an August 31 year-end.Mulberry had $50,000 in accumulated E & P at the beginning of its 2011 fiscal year (September 1,2010)and during the year,it incurred a $75,000 operating loss.It also distributed $65,000 to its sole shareholder,Charles,on November 30,2010.If Charles is a calendar year taxpayer,how should he treat the distribution when he files his 2010 income tax return (assuming the return is filed by April 15,2011)?

A)The distribution has no effect on Charles in the current year.
B)$50,000 of dividend income and $15,000 recovery of capital.
C)$60,000 of dividend income and $5,000 recovery of capital.
D)$65,000 of dividend income.
E)None of the above.

Question 72

Gold Corporation,a calendar year cash basis taxpayer,made estimated tax payments of $400 each quarter in 2010,for a total of $1,600.Gold filed its 2010 tax return in 2011 and the return showed a tax liability $2,100.At the time of filing,March 15,2011,Gold paid an additional $500 in Federal income taxes.How does the additional payment of $500 impact Gold's E & P?

A)Increase by $500 in 2010.
B)Increase by $500 in 2011.
C)Decrease by $500 in 2010.
D)Decrease by $500 in 2011.
E)None of the above.

Question 73

Wendy and David,equal shareholders in Loon Corporation,receive $300,000 each in distributions on December 31 of the current year.Loon's current year E & P is $500,000 and it has no accumulated E & P.Last year,Loon sold an appreciated asset for $600,000 (basis of $200,000).Payment for one half of the sale of the asset was made this year.How much of Wendy's distribution will be taxed as a dividend?

A)$0.
B)$150,000.
C)$250,000.
D)$300,000.
E)None of the above.

Question 74

Swan,a calendar year corporation,has a deficit in current E & P of $200,000 and a $580,000 positive balance in accumulated E & P.If Swan determines that a $1 million distribution to its shareholders is appropriate at some point during the year,what is the maximum amount of the distribution that could potentially be treated as a dividend?

A)$0.
B)$380,000.
C)$480,000.
D)$580,000.
E)None of the above.

Question 75

Which of the following is not an economic distortion created by the double tax on dividends?

A)An incentive to invest in noncorporate rather than corporate businesses.
B)An incentive for corporations to finance operations with debt rather than equity.
C)An incentive to invest domestically rather than internationally.
D)An incentive for corporations to retain earnings and structure distributions to avoid dividend treatment.
E)All of the above represent economic distortions created by the double tax on dividends.

Question 76

On January 1,Gull Corporation (a calendar year taxpayer)has accumulated E & P of $200,000.During the year,Gull incurs a net loss of $280,000 from operations that accrues ratably.On June 30,Gull distributes $120,000 to Sharon,its sole shareholder,who has a basis in her stock of $75,000.How much of the $120,000 is a dividend to Sharon?

A)$0.
B)$60,000.
C)$75,000.
D)$120,000.
E)None of the above.

Question 77

Falcon Corporation has $200,000 of current E & P and a deficit in accumulated E & P of $90,000.If Swan pays a $300,000 distribution to its shareholders on July 1,how much dividend income do the shareholders report?

A)$0.
B)$10,000.
C)$110,000.
D)$200,000.
E)None of the above.

Question 78

Renee,the sole shareholder of Indigo Corporation,sold her stock to Chad on July 1 for $180,000.Renee's stock basis at the beginning of the year was $120,000.Indigo made a $60,000 cash distribution to Renee immediately before the sale,while Chad received a $120,000 cash distribution from Indigo on November 1.As of the beginning of the current year,Indigo had $26,000 in accumulated E & P,while current E & P (before distributions)was $90,000.Which of the following statements is correct?

A)Renee recognizes a $60,000 gain on the sale of the stock.
B)Renee recognizes a $64,000 gain on the sale of the stock.
C)Chad recognizes dividend income of $120,000.
D)Chad recognizes dividend income of $30,000.
E)None of the above.

Question 79

On January 2,2010,Orange Corporation purchased equipment for $300,000 with an ADS recovery period of 10 years and a MACRS useful life of 7 years.Section 179 was not elected.MACRS depreciation properly claimed on the asset,including depreciation in the year of sale,totaled $79,6019- The equipment was sold on July 1,2011,for $290,000.As a result of the sale,the adjustment to taxable income needed to arrive at current E & P is:

A)No adjustment is required.
B)Decrease $49,6019-
C)Increase $49,6019-
D)Decrease $79,6019-
E)None of the above.

Question 80

Which of the following statements is incorrect with respect to determining current E & P?

A)All tax-exempt income should be added back to taxable income.
B)Dividends received deductions should be added back to taxable income.
C)Charitable contributions in excess of the 10% of taxable income limit should be subtracted from taxable income.
D)Federal income tax refunds should be added back to taxable income.
E)None of the above statements are incorrect.