Deck 19: Corporations: Distributions Not in Complete Liquidation

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

Nondeductible meal expense must be subtracted from taxable income to determine current E & P.

Question 5

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

Question 6

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 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

To determine current E & P, taxable income must be increased for any dividends received deduction.

Question 19

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

Question 20

All 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.

Question 21

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 22

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

Question 23

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 24

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 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

Dividends taxed as ordinary income are considered investment income for purposes of the investment interest expense limitation.

Question 27

Certain dividends from foreign corporations can be qualified dividends for purposes of the preferential rate available to individuals.

Question 28

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

Question 29

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

Question 30

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

Question 31

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 32

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 33

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 34

Dividends paid to shareholders who hold both long and short positions do not qualify for the reduced tax rate available to individuals in certain years.

Question 35

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

Question 36

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

Question 37

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 38

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

Question 39

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

Question 40

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

Question 41

As a result of a redemption, a shareholder's interest (direct and indirect) in the corporation decreased from 80% to
55%. The redemption qualifies for sale or exchange treatment as a disproportionate redemption.

Question 42

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 these.

Question 43

In general, if a shareholder's ownership interest is not diminished as a result of a stock redemption, the Code will treat the transaction as a sale or exchange.

Question 44

Vireo Corporation redeemed shares from its sole shareholder pursuant to a written agreement between the parties that clearly identified the transaction as a stock redemption (not a dividend distribution). Since the agreement is binding under state law, the shareholder will receive sale or exchange treatment with respect to the redemption.

Question 45

Puffin Corporation's 2,000 shares outstanding are owned as follows: Paul, 800 shares; Sandra (Paul's sister), 800 shares; and Greta (Paul's granddaughter), 400 shares. During the current year, Puffin (E & P of $1 million) redeemed 600 shares of Paul's stock for $100,000. If Paul acquired the 600 shares five years ago for $30,000, he will have a long-term capital gain of $70,000 from the redemption.

Question 46

For purposes of the waiver of the family attribution rules in a complete termination redemption, the former shareholder must notify the IRS within 30 days of acquiring a prohibited interest in the corporation during the 10-year period following the redemption.

Question 47

For purposes of a partial liquidation, the termination of a business test is a subjective test that should be relied upon only after obtaining a favorable ruling from the IRS.

Question 48

Grackle Corporation (E & P of $600,000) distributes cash of $200,000 and land (fair market value of $400,000; basis of $250,000) to a shareholder in a qualifying stock redemption. The land distributed is subject to a mortgage of
$460,000. Grackle will recognize a gain of $210,000 as a result of the distribution.

Question 49

At a time when Blackbird Corporation had E & P of $700,000 and 1,000 shares of stock outstanding, the corporation distributed $300,000 to redeem 400 shares of its stock. The transaction qualified as a disproportionate redemption for the shareholder. Blackbird's E & P is reduced by $300,000 as a result of the distribution.

Question 50

Betty's adjusted gross estate is $18 million. The death taxes and funeral and administration expenses of her estate total $2.4 million. Included in Betty's gross estate is stock in Heron Corporation valued at $6.6 million as of the date of her death. Betty had acquired the stock six years ago at a cost of $1,620,000. If Heron Corporation redeems $2.4 million 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 51

Rose Corporation (a calendar year taxpayer) has taxable income of $300,000, and its financial records reflect the following for the year. $\begin{array}{lr}\text { Federal income taxes paid } & \$ 110,000 \\\text { Net operating loss carry forward deducted currently } & 70,000 \\\text { Gain recognized this year on an installment sale from a prior year } & 44,000 \\\text { Depreciation deducted on tax return (ADS depreciation would have been } \$ 10,000) & 40,000 \\\text { Interest income on Iowa state bonds } & 8,000\end{array}$ Rose Corporation's current E & P is:

A) $254,000.
B) $214,000.
C) $194,000.
D) $104,000.
E) None of these.

Question 52

Yolanda owns 60% of the outstanding stock of Amber Corporation. In a qualifying stock redemption, Amber distributes $20,000 to Yolanda in exchange for one-half of her shares (basis of $35,000). As a result of the redemption, Yolanda has a recognized capital loss of $15,000.

Question 53

Corporate shareholders generally receive less favorable tax treatment from a qualifying stock redemption than from a dividend distribution.

Question 54

Six years ago, both Ronald and his mom owned 50% of the stock of Bronze Corporation. At such time, Bronze redeemed all of Ronald's stock. For the redemption year, Ronald filed the agreement required of the family attribution waiver and reported the transaction as a complete termination redemption (i.e., sale or exchange). In the current year, the mom passed away and willed her entire stock interest in Bronze to Ronald. The inheritance of Bronze stock by Ronald is a prohibited interest for purposes of the family attribution waiver.

Question 55

Reginald and Roland (Reginald's son) each own 50% of the stock of Robin Corporation. Reginald's stock interest is entirely redeemed by Robin. Two years later, Reginald loans Robin $250,000. The loan to Robin Corporation does not constitute a prohibited interest for purposes of the family attribution waiver.

Question 56

The Code treats corporate distributions that are a return of a shareholder's investment as sales or exchanges and corporate distributions that are a return from a shareholder's investment as dividends.

Question 57

A redemption will qualify as a not essentially equivalent redemption only if the shareholder's interest in the redeeming corporation has been meaningfully reduced.

Question 58

In determining whether a distribution qualifies as a § 303 redemption to pay death taxes, the stock attribution rules must be applied.

Question 59

A shareholder's basis in property acquired in a stock redemption is the property's fair market value as of the date of redemption.

Question 60

In applying the § 318 stock attribution rules to a stock redemption, a shareholder is treated as owning the stock of her spouse, children, grandchildren, parents, and siblings.

Question 61

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 these.

Question 62

Cedar Corporation is a calendar year taxpayer formed in 2015. Cedar's E & P before distributions for each of the past 5 years is listed below. $$\begin{array} { l l } 2019 & \$ 28,000 \\2018 & \$ 40,000 \\2017 & \$ 39,000 \\2016 & \$ 68,000 \\2015 & \$ 16,000\end{array}$$ Cedar Corporation made the following distributions in the previous 5 years. 2018 Land (basis of $70,000, fair market value of $80,000)
2015 $20,000 cash
Cedar's accumulated E & P as of January 1, 2020 is:

A) $91,000.
B) $95,000.
C) $101,000.
D) $105,000.
E) None of these.

Question 63

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 these.

Question 64

Stacey and Eva 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 Eva on May 1. If Parakeet's current E & P is $60,000, how much is allocated to Eva's distribution?

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

Question 65

Tangelo Corporation has an August 31 year-end. Tangelo had $50,000 in accumulated E & P at the beginning of its 2020 fiscal year (September 1, 2019) and during the year, it incurred a $75,000 operating loss. It also distributed
$65,000 to its sole shareholder, Cass, on November 30, 2019. If Cass is a calendar year taxpayer, how should she treat the distribution when she files her 2019 income tax return (assuming the return is filed by April 15, 2020)?

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 these.

Question 66

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 these.

Question 67

Tungsten Corporation, a calendar year cash basis taxpayer, made estimated tax payments of $800 each quarter in 2019, for a total of $3,200. Tungsten filed its 2019 tax return in 2020 and the return showed a tax liability $4,200. When it filed its tax return in 2020, 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 2019.
B) Increase by $1,000 in 2020.
C) Decrease by $1,000 in 2019.
D) Decrease by $1,000 in 2020.
E) None of these.

Question 68

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 these.

Question 69

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) Current-year 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 these statements are incorrect.

Question 70

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 these.

Question 71

Silver Corporation, a calendar year taxpayer, has taxable income of $550,000. Among its transactions for the year are the following: $\begin{array}{lr}\text { Collection of proceeds from insurance policy on life of corporate }\\\text { officer (in excess of cash surrender value) } & \$ 82,500 \\\text { Realized gain (not recognized) on an involuntary conversion } & 11,000 \\\text { Nondeductible fines and penalties } & 44,000\end{array}$ Disregarding any provision for Federal income taxes, Silver Corporation's current E & P is:

A) $500,500.
B) $588,500.
C) $599,500.
D) $687,500.
E) None of these.

Question 72

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 these.

Question 73

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 these.

Question 74

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 these.

Question 75

On January 2, 2019, 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, 2020, 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 these.

Question 76

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 these.

Question 77

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 these.

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 and 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 and 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 these.

Question 79

At the beginning of the current year, both Doug and Amelia 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 Amelia) and distributed another $300,000 on November 1 ($150,000 to Kevin and $150,000 to Amelia). Kevin has dividend income of:

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

Question 80

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 these.