Deck 13: Corporations: Earnings Profits and Distributions

Question 1

Cash distributions received from a corporation with a positive balance in accumulated E & P at the beginning of the year will be taxed as dividend income.

Answer 1

False

Question 2

Distributions that are not dividends are a return of capital and decrease the shareholder's basis.

Answer 2

False

Question 3

When computing current E & P,taxable income must be adjusted for the deferred gain in a § 1031 like-kind exchange.

Answer 3

False

Question 4

In the current year,Carnation Corporation has a § 179 expense of $20,000.As a result,in the current year,taxable income must be increased by $16,000 to determine current E & P.

Question 5

No E & P adjustment is required for regular tax gains under the installment method.

Question 6

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

Question 7

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

Question 8

When computing E & P,taxable income is not adjusted for § 179 expense.

Question 9

A realized gain from an involuntary conversion under § 1033 that is not recognized for income tax purposes has no effect on E & P.

Question 10

A deficit in current E & P is treated as occurring ratably during the year,unless the taxpayer can show otherwise.

Question 11

A corporation borrows money to purchase State of Texas bonds.The interest on the loan has no impact on either taxable income or current E & P.

Question 12

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

Question 13

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

Question 14

To determine current E & P,taxable income must be increased for any domestic production activities deduction.

Question 15

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

Question 16

An increase in the LIFO recapture amount must be added to taxable income to determine E & P.

Question 17

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

Question 18

The dividends received deduction has no impact on E & P.

Question 19

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

Question 20

Use of MACRS cost recovery when computing taxable income does not require an E & P adjustment.

Question 21

Falcon Corporation ended its first year of operations with taxable income of $250,000.At the time of Falcon's formation,it incurred $50,000 of organizational expenses.In calculating its taxable income for the year,Falcon claimed an $8,000 deduction for the organizational expenses.What is Falcon's current E & P?

A) $200,000
B) $208,000
C) $250,000
D) $258,000
E) None of the above

Question 22

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

Question 23

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 24

Tracy and Lance,equal shareholders in Macaw Corporation,receive $600,000 each in distributions on December 31 of the current year.Macaw's current year taxable income is $1 million and it has no accumulated E & P.Last year,Macaw sold an appreciated asset for $1,200,000 (basis of $400,000).Payment for one-half of the sale of the asset was made this year.How much of Tracy's distribution will be taxed as a dividend?

A) $0
B) $300,000
C) $500,000
D) $600,000
E) None of the above

Question 25

During the year,Blue Corporation distributes land to its sole shareholder.If the fair market value of the land is less than its adjusted basis,Blue will not be able to recognize a loss on the distribution.

Question 26

In a property distribution,the amount of dividend income recognized by a shareholder is always reduced by the amount of liability assumed by a shareholder.

Question 27

If there is sufficient E & P,a distribution of nonconvertible preferred stock to common shareholders is taxable.

Question 28

Tern Corporation,a cash basis taxpayer,has taxable income of $500,000 for the current year.Tern elected $25,000 of § 179 expense.It also had a related party loss of $20,000 and a realized (not recognized)gain from an involuntary conversion of $75,000.It paid Federal income tax of $150,000 and paid a nondeductible fine of $10,000.Tern's current E & P is:

A) $415,000.
B) $350,000.
C) $340,000.
D) $320,000.
E) None of the above.

Question 29

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

Question 30

If a stock dividend is taxable,the shareholder's basis in the newly received shares is equal to the fair market value of the shares received in the distribution.

Question 31

Constructive dividends do not need to satisfy the legal requirements for a dividend as set forth by applicable state law.

Question 32

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

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

Question 33

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

Question 34

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

Question 35

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

Question 36

Aaron and Michele,equal shareholders in Cavalier Corporation,receive $25,000 each in distributions on December 31 of the current year.During the current year,Cavalier sold an appreciated asset for $60,000 (basis of $15,000).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 6 percent.Before considering the effect of the asset sale,Cavalier's current year E & P is $40,000 and it has no accumulated E & P.How much of Aaron's distribution will be taxed as a dividend?

A) $0
B) $20,000
C) $25,000
D) $42,500
E) None of the above

Question 37

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.

Question 38

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 39

Under certain circumstances,a distribution can generate (or add to)a deficit in E & P.

Question 40

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 a dividend to the extent of the balance.

Question 41

As of January 1,Cassowary Corporation has a deficit in accumulated E & P of $100,000.For the tax year,current E & P (accrued ratably)is $240,000 (prior to any distributions).On July 1,Cassowary Corporation distributes $275,000 to its sole shareholder.The amount of the distribution that is a dividend is:

A) $20,000.
B) $140,000.
C) $240,000.
D) $275,000.
E) None of the above.

Question 42

Rust Corporation distributes property to its sole shareholder,Andre.The property has a fair market value of $350,000,an adjusted basis of $205,000,and is subject to a liability of $220,000.Current E & P is $500,000.With respect to the distribution,which of the following statements is correct?

A) Rust has a gain of $15,000 and Andre has dividend income of $350,000.
B) Rust has a gain of $145,000 and Andre's basis in the distributed property is $130,000.
C) Rust has a gain of $130,000 and Andre's basis in the distributed property is $350,000.
D) Rust has a gain of $145,000 and Andre has dividend income of $130,000.
E) None of the above.

Question 43

Robin Corporation,a calendar year taxpayer,has a deficit in current E & P of $200,000 and a $580,000 positive balance in accumulated E & P.If Robin determines that a $700,000 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 44

At the beginning of the current year,Doug and Alfred each own 50% of Amaryllis Corporation (a calendar year taxpayer).In July,Doug sold his stock to Kevin for $140,000.At the beginning of the year,Amaryllis Corporation had accumulated E & P of $240,000 and its current E & P is $280,000 (prior to any distributions).Amaryllis distributed $300,000 on February 15 ($150,000 to Doug and $150,000 to Alfred)and distributed another $300,000 on November 1 ($150,000 to Kevin and $150,000 to Alfred).Kevin has dividend income of:

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

Question 45

Brett owns stock in Oriole Corporation (basis of $100,000)as an investment.Oriole distributes property (fair market value of $375,000;basis of $187,500)to him during the year.Oriole has current E & P of $25,000 (which includes the E & P gain on the property distribution),accumulated E & P of $100,000,and makes no other distributions during the year.What is Brett's capital gain on the distribution?

A) $0
B) $100,000
C) $150,000
D) $187,500
E) None of the above

Question 46

Tangelo Corporation has an August 31 year-end.Tangelo had $50,000 in accumulated E & P at the beginning of its 2016 fiscal year (September 1,2015)and during the year,it incurred a $75,000 operating loss.It also distributed $65,000 to its sole shareholder,Cass,on November 30,2015.If Cass is a calendar year taxpayer,how should she treat the distribution when she files her 2015 income tax return (assuming the return is filed by April 15,2016)?

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

Question 47

On January 2,2015,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 $79,605.The equipment was sold on July 1,2016,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 $49,605.
C) Increase $49,605.
D) Decrease $79,605.
E) None of the above.

Question 48

During the current year,Hawk Corporation sold equipment for $600,000 (adjusted basis of $360,000).The equipment was purchased a few years ago for $760,000 and $400,000 in MACRS deductions have been claimed.ADS depreciation would have been $300,000.As a result of the sale,the adjustment to taxable income needed to determine current E & P is:

A) No adjustment is required.
B) Subtract $100,000.
C) Add $100,000.
D) Add $80,000.
E) None of the above.

Question 49

On January 1,Eagle Corporation (a calendar year taxpayer)has accumulated E & P of $300,000.During the year,Eagle incurs a net loss of $420,000 from operations that accrues ratably.On June 30,Eagle distributes $180,000 to Libby,its sole shareholder,who has a basis in her stock of $112,500.How much of the $180,000 is a dividend to Libby?

A) $0
B) $90,000
C) $112,500
D) $180,000
E) None of the above

Question 50

Navy Corporation has E & P of $240,000.It distributes land with a fair market value of $70,000 (adjusted basis of $25,000)to its sole shareholder,Troy.The land is subject to a liability of $55,000 that Troy assumes.Troy has:

A) A taxable dividend of $15,000.
B) A taxable dividend of $25,000.
C) A taxable dividend of $45,000.
D) A taxable dividend of $70,000.
E) A basis in the machinery of $55,000.

Question 51

Pheasant Corporation,a calendar year taxpayer,has $400,000 of current E & P and a deficit in accumulated E & P of $180,000.If Pheasant pays a $600,000 distribution to its shareholders on July 1,how much dividend income do the shareholders report?

A) $0
B) $20,000
C) $220,000
D) $400,000
E) None of the above

Question 52

Blue Corporation has a deficit in accumulated E & P of $300,000 and has current E & P of $225,000.On July 1,Blue distributes $250,000 to its sole shareholder,Sam,who has a basis in his stock of $52,500.As a result of the distribution,Sam has:

A) Dividend income of $225,000 and reduces his stock basis to $27,500.
B) Dividend income of $52,500 and reduces his stock basis to zero.
C) Dividend income of $225,000 and no adjustment to stock basis.
D) No dividend income,reduces his stock basis to zero,and has a capital gain of $250,000.
E) None of the above.

Question 53

Purple Corporation has accumulated E & P of $100,000 on January 1,2015.In 2015,Purple has current E & P of $130,000 (before any distribution).On December 31,2015,the corporation distributes $250,000 to its sole shareholder,Cindy (an individual).Purple Corporation's E & P as of January 1,2016 is:

A) $0.
B) ($20,000).
C) $100,000.
D) $130,000.
E) None of the above.

Question 54

Tungsten Corporation,a calendar year cash basis taxpayer,made estimated tax payments of $800 each quarter in 2015,for a total of $3,200.Tungsten filed its 2015 tax return in 2016 and the return showed a tax liability $4,200.At the time of filing,March 15,2016,Tungsten paid an additional $1,000 in Federal income taxes.How does the additional payment of $1,000 impact Tungsten's E & P?

A) Increase by $1,000 in 2015.
B) Increase by $1,000 in 2016.
C) Decrease by $1,000 in 2015.
D) Decrease by $1,000 in 2016.
E) None of the above.

Question 55

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 56

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 57

Puffin Corporation makes a property distribution to its sole shareholder,Bonnie.The property distributed is a car (basis of $30,000;fair market value of $20,000)that is subject to a $6,000 liability which Bonnie assumes.Puffin has no accumulated E & P and $30,000 of current E & P from other sources during the year.What is Puffin's E & P after taking into account the distribution of the car?

A) $4,000
B) $6,000
C) $10,000
D) $14,000
E) None of the above

Question 58

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 59

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 60

Purple Corporation makes a property distribution to its sole shareholder,Paul.The property distributed is a house (fair market value of $189,000;basis of $154,000)that is subject to a $245,000 mortgage that Paul assumes.Before considering the consequences of the distribution,Purple's current E & P is $35,000 and its accumulated E & P is $140,000.Purple makes no other distributions during the current year.What is Purple's taxable gain on the distribution of the house?

A) $0
B) $21,000
C) $35,000
D) $91,000
E) None of the above

Question 61

Robin Corporation distributes furniture (basis of $40,000;fair market value of $50,000)as a property dividend to its shareholders.The furniture is subject to a liability of $55,000.Robin Corporation recognizes gain of:

A) $55,000.
B) $15,000.
C) $10,000.
D) $0.
E) None of the above.

Question 62

Briefly describe the reason a corporation might distribute a property dividend to a shareholder in lieu of a cash distribution.Describe the tax effects of the property distribution on the shareholder and on the corporation.

Question 63

Finch Corporation (E & P of $400,000)distributed machinery ($10,000 adjusted basis,$150,000 fair market value)to its sole shareholder,Kathleen.The property is subject to a $50,000 mortgage,which Kathleen assumed.How much dividend income does Kathleen recognize as a result of the distribution and what is her basis in the machinery?

Question 64

At the beginning of the current year,Paul and John each own 50% of Apple Corporation.In July,Paul sold his stock to Sarah for $110,000.At the beginning of the year,Apple Corporation had accumulated E & P of $200,000 and its current E & P is $250,000 (prior to any distributions).Apple distributed $260,000 on March 1 ($130,000 to Paul and $130,000 to John)and distributed another $260,000 on October 1 ($130,000 to Sarah and $130,000 to John).What are the tax implications of the $130,000 distribution to Sarah?

Question 65

On January 1,Tulip Corporation (a calendar year taxpayer)has accumulated E & P of $300,000.Its current E & P for the year is $90,000 (before considering dividend distributions).During the year,Tulip distributes $600,000 ($300,000 each)to its equal shareholders,Anne and Tom.Anne has a basis in her stock of $65,000,while Tom's basis is $120,000.What is the effect of the distribution by Tulip Corporation on Anne and Tom?

Question 66

Gold Corporation has accumulated E & P of $2 million as of January 1 of the current year.During the year,it expects to have earnings from operations of $1,680,000 and to distribute $900,000 in cash to shareholders.Gold Corporation also expects to sell an asset for a loss of $2 million.Thus,it anticipates incurring a deficit of $320,000 for the year.What can Gold do to minimize the amount of dividend income to its shareholders?

Question 67

Stephanie is the sole shareholder and president of Hawk Corporation.She feels that she can justify at least a $220,000 bonus this year because of her performance.However,rather than a bonus in the form of a salary,she plans to have Hawk pay her a $220,000 dividend.Because Stephanie's marginal tax rate is 35%,she prefers to receive a dividend taxed at 15%.Her accountant,however,suggests a $310,000 bonus in lieu of the $220,000 dividend since Hawk Corporation is in the 34% tax bracket.Should Stephanie take the $220,000 dividend or the $310,000 bonus? Support your answer by computing the after-tax cost of the two alternatives to Hawk and to Stephanie.

Question 68

On January 1,Gold Corporation (a calendar year taxpayer)has E & P of $30,000 and generates no additional E & P during the year.On March 31,the corporation distributes $40,000 to its sole shareholder,Wyatt (basis in stock of $8,000).Determine the effect of the distribution on Wyatt's taxable income and stock basis.

Question 69

Jen,the sole shareholder of Mahogany Corporation,sold her stock to Jason on July 1 for $90,000.Jen's stock basis at the beginning of the year was $60,000.Mahogany made a $30,000 cash distribution to Jen immediately before the sale,while Jason received a $60,000 cash distribution from Mahogany on November 1.As of the beginning of the current year,Mahogany had $16,000 in accumulated E & P,while current E & P (before distributions)is $30,000.What are the tax consequences of these transactions to Jen and Jason?

Question 70

Scarlet Corporation is an accrual basis,calendar year corporation.Scarlet distributes inventory (basis of $20,000;fair market value of $40,000)to Frank,its shareholder.Assuming that Scarlet has $500,000 of current E & P,what is the impact of the distribution on Scarlet Corporation and on Frank?

Question 71

How does the definition of accumulated E & P differ from the definition of current E & P?

Question 72

Timothy owns 100% of Forsythia Corporation's stock.Corporate employees and annual salaries include Timothy ($300,000);Richard,Timothy's son ($80,000);Rita,Timothy's daughter ($100,000);and Sandy ($120,000).The operation of Forsythia Corporation is shared about equally between Timothy and Sandy (an unrelated party).Richard and Rita are full-time college students at a university about 150 miles away.Forsythia Corporation has substantial E & P but has not distributed a dividend for the past five years.Discuss problems related to the salary arrangement for Forsythia Corporation.

Question 73

Maria owns 75% and Christopher owns 25% of Cockatoo Corporation,a calendar year taxpayer.Cockatoo makes a $600,000 distribution to Maria on April 1 and a $200,000 distribution to Christopher on May 1.Cockatoo's current E & P is $120,000 and its accumulated E & P is $500,000.What are the tax implications of the distributions to Maria and Christopher?

Question 74

Sylvia owns 25% of Cormorant Corporation.Cormorant sells diamonds to retail jewelry businesses.While Cormorant has a deficit in accumulated E & P of $56,000 at the beginning of the year,its current E & P is $500,000.Since the company had a successful year,Cormorant pays a $36,000 distribution to each of the company's four shareholders on December 15.Three shareholders receive cash,but Cormorant distributes a diamond (adjusted basis of $40,000 and a fair market value of $36,000)to Sylvia in lieu of cash.Determine the effect of distributing the diamond on Cormorant's and on Sylvia's taxable income.What is Sylvia's basis in the diamond? Was the distribution good tax planning on the part of Cormorant? Why or why not?

Question 75

Ashley,the sole shareholder of Hawk Corporation,has a stock basis of $200,000 at the beginning of the year.On July 1,she sells all of her stock to Matt for $1 million.On January 1,Hawk has accumulated E & P of $90,000 and during the year,current E & P of $160,000.Hawk makes the following cash distributions: $270,000 to Ashley on March 31 and $90,000 to Matt on December 1.How are the distributions taxed to Ashley and Matt? What is Ashley's recognized gain on the sale to Matt?

Question 76

Ten years ago,Carrie purchased 2,000 shares in Osprey Corporation for $20,000.In the current year,Carrie receives a nontaxable stock dividend of 20 shares of Osprey preferred.Values at the time of the dividend are: $8,000 for the preferred stock and $72,000 for the common.Based on this information,Carrie's basis in the stock is:

A) $20,000 in the common and $8,000 in the preferred.
B) $2,000 in the common and $18,000 in the preferred.
C) $18,000 in the common and $2,000 in the preferred.
D) $19,802 in the common and $198 in the preferred.
E) None of the above.

Question 77

Albatross Corporation acquired land for investment purposes in 2001 at a cost of $100,000.Albatross sold the land to Monty on December 30,2015,and did not elect out of the installment method of accounting.The selling price of the property was $400,000.Monty made a cash down payment of $50,000 on the date of sale and executed a $350,000 note,payable in seven annual installments of $50,000 each plus interest at the rate of 6% per annum.The first installment of $50,000 was due in 2016 which Monty paid,plus interest of $21,000.Discuss the effect of this sale on Albatross's taxable income and its E & P account in 2015 and 2016.

Question 78

Starling Corporation has accumulated E & P of $60,000 on January 1,2015.In 2015,Starling Corporation had an operating loss of $80,000.It distributed cash of $40,000 to Zoe,its sole shareholder,on December 31,2015.Starling Corporation's balance in its E & P account as of January 1,2016,is:

A) $60,000 deficit.
B) $20,000 deficit.
C) $0.
D) $60,000.
E) None of the above.

Question 79

Thrush,Inc. ,is a calendar year,accrual basis corporation with Henry as its sole shareholder (basis in his stock is $90,000).On January 1 of the current year,Thrush Corporation has accumulated E & P of $200,000.Before considering the effect of the distribution described below,the corporation's current E & P is $50,000.On November 1,Thrush distributes an office building to Henry.The office building has an adjusted basis of $80,000 (fair market value of $100,000)and is subject to a mortgage of $110,000.Assume that the building has been depreciated using the ADS method for both income tax and E & P purposes.What are the tax consequences of the distribution to Thrush and to Henry? (In your answer,be sure to describe the effects on taxable income for both Thrush and Henry,the impact of the distribution on Thrush's E & P,and Henry's basis in the building. )

Question 80

How does the payment of a property dividend affect E & P?