Question 1

Pursuant to a liquidation,Coral Corporation distributes to Lucinda,a shareholder,land (basis of $90,000,fair market value of $200,000).The land is subject to a $75,000 liability.Lucinda will have a basis of $125,000 in the land.

Accepted Answer

Lucinda's basis in the land will be $90,000, which is Coral Corporation's basis in the land. The liability does not affect the basis of the property received in the distribution.

Question 2

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

Accepted Answer

The answer of When current E & P is positive...

Question 3

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.

Accepted Answer

The answer of Property distributed by a corporation as a...

Question 4

As a general rule,a liquidating corporation recognizes gains but not losses on the distribution of property in complete liquidation.

Accepted Answer

The answer of As a general rule,a liquidating corporation recognizes...

Question 5

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

Accepted Answer

The answer of A corporate shareholder that receives a constructive...

Question 6

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

Accepted Answer

When a corporation redeems stock, the shareholder usually receives capital gains treatment on the redemption proceeds, which are taxed at a higher rate than qualified dividends. Therefore, shareholders generally receive less favorable tax treatment from a qualifying stock redemption than from a dividend distribution.

Question 7

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

Accepted Answer

The answer of If there is sufficient E & P,a...

Question 8

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

Accepted Answer

Constructive dividends refer to the deemed distribution of corporate earnings or assets to shareholders, even if no actual dividend has been declared or paid. They do not have to meet the formal requirements of a dividend under state law, as they are not technically considered dividends.

Question 9

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.

Accepted Answer

When 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. This means that the shareholder will have to pay taxes on the value of the shares received as dividends, and the basis for any future gains or losses will be the fair market value of the shares at the time of the distribution.

Question 10

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.

Accepted Answer

When the current E&P has a deficit and accumulated E&P is positive, the accounts are netted at the date of the distribution. If a positive balance results, the distribution is considered a dividend to the extent of the balance.

Question 11

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.

Accepted Answer

The answer of A corporation that distributes a property dividend...

Question 12

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.

Accepted Answer

The answer of In a property distribution,the amount of dividend...

Question 13

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

Accepted Answer

Constructive dividends do affect a corporation's Earnings and Profits (E&P) because they are treated as if the corporation had declared and paid a cash dividend, thus reducing the corporation's E&P.

Question 14

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

Accepted Answer

According to the Internal Revenue Code section 302(d)(1), a shareholder's basis in property received in a stock redemption is equal to the fair market value of the property as of the date of redemption. This is also known as the "substitute basis" rule.

Question 15

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

Accepted Answer

The answer of Under certain circumstances,a distribution can generate (or...

Question 16

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

Accepted Answer

The answer of Regardless of any deficit in current E...

Question 17

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.

Accepted Answer

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

Question 18

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.

Accepted Answer

This is because a loss on a distribution of property cannot be recognized if the fair market value of the property is less than its adjusted basis. This is known as the "anti-abuse" rule under Section 311(b) of the Internal Revenue Code.

Question 19

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.

Accepted Answer

For a redemption to qualify as disproportionate, the shareholder's interest must fall below 50% of the total combined voting power of all classes of stock entitled to vote or below 50% of the total number of shares of all other classes of stock after the redemption. In this case, decreasing from 80% to 55% does not meet this requirement.

Question 20

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.

Accepted Answer

This is a general rule in taxation and refers to the distribution of earnings and profits by a corporation, which are taxed as dividends unless proven otherwise through a detailed accounting analysis.

Quiz 10: Corporations: Earnings Profits and Distributions