Question 1

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

Accepted Answer

The distribution should be first allocated to E&P in the amount of $8,000, which is tax-free to Morris. The remaining $3,000 of the distribution will be treated as a return of capital, reducing Morris's basis in his stock to $6,000 ($9,000 - $3,000).

Since the corporation incurred a current E&P deficit of $18,250, the entire distribution would be a dividend if E&P and current E&P deficits were not taken into account. However, since the corporation had accumulated E&P at the beginning of the year, a portion of the distribution (up to the amount of E&P) can be treated as a tax-free return of capital. The remaining portion of the distribution (the current E&P deficit) is treated as a dividend.

Therefore, the distribution of $11,000 should be allocated as follows:

- $8,000 tax-free return of capital
- $3,000 dividend

Thus, the answer is B: $4,100 dividend and a $6,900 tax-free return of capital.

Question 2

Omega Corporation is formed in 2006. Its current E&P and distributions for each year through 2010 are as follows:  Is the distribution made from current or accumulated E&P? At the beginning of 2011, what is accumulated E&P?

Accepted Answer

The $18,000 distribution is made from 2009's current E&P. At the beginning of 2010, Omega's accumulated E&P is $28,000, (- $20,000 + $30,000 + $36,000 - $18,000). At the beginning of 2011, Omega's accumulated E&P is $44,000, ($28,000 + $16,000).

Question 3

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

Accepted Answer

Retained earnings and earnings and profits (E&P) are distinct concepts in corporate finance and tax accounting. Retained earnings refer to the cumulative amount of net income left over for the business after it has paid out dividends to its shareholders. Earnings and profits, on the other hand, is a tax concept used to determine whether a distribution to shareholders is considered a dividend. While retained earnings can influence E&P, they are not always interchangeable, as E&P calculations include adjustments for tax purposes that are not reflected in retained earnings.

Question 4

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.

Accepted Answer

This is true according to the Internal Revenue Service (IRS) guidelines for computing E&P. Section 179 property must be expensed ratably over a five-year period, starting with the month it was expensed for Sec. 179 purposes.

Question 5

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

Accepted Answer

When Crossroads Corporation distributed $60,000 to Harley, $55,000 was considered earnings and profits, and $5,000 was deemed a return of capital. The return of capital will decrease Harley's basis in her stock, which was initially $20,000. Therefore, Harley's new basis in her stock will be $20,000 - $5,000 = $15,000.

Question 6

On April 1, Delta Corporation distributes $120,000 in cash to each of its two equal shareholders, Sarah and Matt. At the time of the distribution, Delta's E&P is $160,000. Sarah's basis in her stock is $50,000 and Matt's basis in his stock is $20,000. How are the distributions characterized to Sarah and Matt? Be specific.

Accepted Answer

The answer of On April 1, Delta Corporation distributes $120,000...

Question 7

Identify which of the following statements is true.

Accepted Answer

The answer of Identify which of the following statements is...

Question 8

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

Accepted Answer

The deduction for E&P purposes is calculated based on the depreciation that would have been allowed had the Sec. 179 deduction not been taken. Since the equipment has a seven-year class life, the depreciation deduction for the year of purchase should be $2,143 ($15,000/7). However, since the corporation expensed the full $15,000 under Sec. 179, the depreciation deduction is reduced to $0. Therefore, the difference between the actual depreciation deduction and the allowable depreciation deduction is $2,143, which is the amount of the E&P adjustment. However, since only $3,000 was expensed under Sec. 179, the E&P adjustment is limited to that amount.

Question 9

How does a shareholder classify a distribution for tax purposes?

Accepted Answer

The answer of How does a shareholder classify a distribution...

Question 10

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

Accepted Answer

The answer of Identify which of the following statements is...

Question 11

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

Accepted Answer

Dividends-received deduction reduces taxable income and is not included in the calculation of E&P. A, B, and C are all deductible expenses that are included in the calculation of E&P.

Question 12

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

Accepted Answer

Corporate distributions that exceed earnings and profits may be classified as a return of capital (not taxable) up to the shareholder's investment basis. If the distribution exceeds the shareholder's basis, the excess may be treated as a capital gain. However, it is not always a capital gain as it depends on various factors such as the type of distribution and the shareholder's basis.

Question 13

In 2010, Tru Corporation deducted $5,000 of bad debts. It received no tax benefit from the deduction because it h NOL in 2010 that it was unable to carry back or forward. In 2011, Tru recovered $4,000 of the amount due.
a) What amount must Tru include in income in 2011?
b) What effect does the $4,000 have on E&P in 2011, if any?

Accepted Answer

The answer of In 2010, Tru Corporation deducted $5,000 of...

Question 14

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?

Accepted Answer

Current and accumulated earnings and profits are both at $0, so the distribution of $10,000 would simply reduce the corporation's cash reserves and not affect its earnings and profits.

Question 15

Identify which of the following increases Earnings & Profits.

Accepted Answer

The answer of Identify which of the following increases Earnings...

Question 16

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

Accepted Answer

The answer of Exit Corporation has accumulated E&P of $24,000...

Question 17

In the current year, Ho Corporation sells land that has a $6,000 basis and a $10,000 FMV to Henry, an unrelated individual. Henry makes a $2,500 down payment this year and will pay Ho $2,500 per year for the next three years, plus interest on the unpaid balance at a rate acceptable to the IRS. Ho's realized gain is $4,000. Since Ho is not in the business of selling land, it will use the installment method of accounting. How does this transaction affect Ho's E&P in the current year and the three subsequent years?

Accepted Answer

The answer of In the current year, Ho Corporation sells...

Question 18

Poppy Corporation was formed three years ago. Poppy's E&P history is as follows:  Poppy Corporation's accumulated E&P on January 1 will be

Accepted Answer

The answer of Poppy Corporation was formed three years ago....

Question 19

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

Accepted Answer

The increase in E&P for the year of sale equals the gross profit on the sale, which is $43,000 ($100,000 selling price – $57,000 basis).

Question 20

Current E&P does not include

Accepted Answer

The answer of Current E&P does not include
...

Quiz 4: Corporate Nonliquidating Distributions

Omega Corporation is formed in 2006. Its current E&P and distributions for each year through 2010 are as follows: Is the distribution made from current or accumulated E&P? At the beginning of 2011, what is accumulated E&P?