Question 1

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:

Accepted Answer

The taxable dividend is $15,000, calculated as the fair market value of the land ($70,000) minus the liability assumed ($55,000). This is because dividends are generally calculated based on the net value received by the shareholder.

Question 2

Matching
Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
-Gain on installment sale in 2017 deferred until 2018.

Accepted Answer

The gain on the installment sale, although deferred for tax purposes until 2018, should be recognized in the year of the sale (2017) for purposes of calculating current Earnings and Profits (E&P). This is because E&P calculations generally follow financial accounting principles rather than tax accounting principles, aiming to reflect the corporation's true economic performance. Therefore, deferring the gain does not affect the E&P in the year of the sale; it increases it as the gain is recognized immediately.

Question 3

Matching
Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
-Loss on sale between related parties in 2017.

Accepted Answer

Under Section 267 of the Internal Revenue Code, losses on the sale between related parties are disallowed. Therefore, this transaction would not be recognized for tax purposes, resulting in no deduction for the loss. As a result, current E&P would be increased, which is opposite to taxable income. Therefore, adjusting taxable income to arrive at current E&P would result in a decrease.

Question 4

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?

Accepted Answer

The answer of Brett owns stock in Oriole Corporation (basis...

Question 5

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?

Accepted Answer

The answer of Puffin Corporation makes a property distribution to...

Question 6

In the current year, Warbler Corporation (E & P of $250,000) made the following property distributions to its shareholders (all corporations): $$\begin{array} { l r r } 
& \text { Adjusted Basis } & \frac { \text { Fair Market } } { \text { Value } } \
\text { Fink Corporation stock (held for investment) } & \$ 150,000 & \$ 120,000 \
\text { Non-LIFO inventory } & 80,000 & 110,000
\end{array}$$ ? Warbler Corporation is not a member of a controlled group.As a result of the distribution:

Accepted Answer

The answer of In the current year, Warbler Corporation (E...

Question 7

Matching
Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
-Meal and entertainment expenses not deducted in 2017 because of the 50% limitation.

Accepted Answer

The meal and entertainment expenses not deducted in 2017 would have increased the E&P if they had been deducted. Therefore, not deducting them in 2017 would decrease the current E&P in 2017.

Question 8

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?

Accepted Answer

Eagle Corporation has accumulated E & P of $300,000 at the beginning of the year. During the year, Eagle incurs a net loss of $420,000. The loss accrued ratably means that the loss is incurred evenly throughout the year.

Therefore, the total E & P at the end of the year is:

$300,000 (beginning balance) - $420,000 (net loss) = ($120,000)

As the E & P balance is negative, the entire distribution is considered as a dividend to the shareholder. The amount of dividend is $180,000.

The shareholder, Libby, has a basis in her stock of $112,500. As the entire $180,000 is treated as a dividend, her basis will not be adjusted.

Therefore, $180,000 is a dividend to Libby. The correct answer is B).

Question 9

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:

Accepted Answer

First, we need to calculate the amount of E&P before each distribution:
- Before February 15 distribution: $240,000 (accumulated at the beginning of the year)
- Before November 1 distribution: $580,000 ($240,000 + $300,000 February distribution + $40,000 current year E&P)

Then, we need to allocate the November 1 distribution between Alfred and Kevin, based on their ownership at the time:
- Alfred: 50% x $150,000 = $75,000
- Kevin: 50% x $150,000 = $75,000

Finally, we need to calculate the portion of the November 1 distribution that represents a dividend for Kevin:
- Kevin received $75,000 on November 1
- Out of that amount, $40,000 represents current year E&P (not a dividend)
- The remaining $35,000 represents a dividend for Kevin

Therefore, the answer is C) $110,000 (dividend income of $35,000 from the November 1 distribution).

Question 10

Which of the following statements regarding constructive dividends is not correct?

Accepted Answer

The answer of Which of the following statements regarding constructive...

Question 11

Starling Corporation has accumulated E & P of $60,000 on January 1, 2017.In 2017, Starling Corporation had an operating loss of $80,000.It distributed cash of $40,000 to Zoe, its sole shareholder, on December 31, 2017.Starling Corporation's balance in its E & P account as of January 1, 2018, is:

Accepted Answer

The operating loss of $80,000 reduces the E & P balance to $-20,000. However, since the corporation distributed $40,000 to Zoe, the final balance on January 1, 2018 is $-20,000 - $40,000 = $-60,000, which is a $20,000 deficit. Therefore, the correct answer is B.

Question 12

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?

Accepted Answer

Purple Corporation recognizes a gain of $91,000 on the distribution of the house. This is calculated as the fair market value of the house ($189,000) minus its basis ($154,000) plus the mortgage assumed by Paul ($245,000) minus the fair market value again ($189,000), resulting in a gain of $91,000. The mortgage assumption is considered as part of the amount realized on the distribution, increasing the total amount realized, from which the basis of the property is subtracted to determine the gain.

Question 13

Purple Corporation has accumulated E & P of $100,000 on January 1, 2017.In 2017, Purple has current E & P of $130,000 (before any distribution).On December 31, 2017, the corporation distributes $250,000 to its sole shareholder, Cindy (an individual).Purple Corporation's E & P as of January 1, 2018 is:

Accepted Answer

The distribution of $250,000 first reduces the current E&P of $130,000 to $0, and then reduces the accumulated E&P of $100,000 to $0, leaving Purple Corporation with $0 E&P as of January 1, 2018.

Question 14

Which one of the following statements about property distributions is false?

Accepted Answer

The answer of Which one of the following statements about...

Question 15

Matching
Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
-Federal income tax refunds from tax paid in prior years.

Accepted Answer

Federal income tax refunds from taxes paid in prior years would increase current Earnings and Profits (E&P) for 2017 because these refunds represent a recovery of an expense (taxes) that would have reduced E&P in the year the taxes were paid.

Question 16

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?

Accepted Answer

The answer of Rust Corporation distributes property to its sole...

Question 17

Ten years ago, Carrie purchased 2,000 shares of common stock 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:

Accepted Answer

The answer of Ten years ago, Carrie purchased 2,000 shares...

Question 18

Matching
Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
-Cash dividends distributed to shareholders in 2017.

Accepted Answer

The answer of Matching
Using the legend provided, classify each statement...

Question 19

Matching
Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
-Interest received from municipal bonds in 2017.

Accepted Answer

The answer of Matching
Using the legend provided, classify each statement...

Question 20

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:

Accepted Answer

Robin Corporation recognizes a gain of $15,000, which is the difference between the fair market value of the furniture ($50,000) and its basis ($40,000). The liability exceeding the fair market value does not affect the calculation of gain for the corporation's distribution.

Quiz 13: Earnings Profits and Distributions

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:

Matching Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -Gain on installment sale in 2017 deferred until 2018.

Matching Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -Loss on sale between related parties in 2017.

Matching Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -Meal and entertainment expenses not deducted in 2017 because of the 50% limitation.

Which of the following statements regarding constructive dividends is not correct?

Starling Corporation has accumulated E & P of $60,000 on January 1, 2017.In 2017, Starling Corporation had an operating loss of $80,000.It distributed cash of $40,000 to Zoe, its sole shareholder, on December 31, 2017.Starling Corporation's balance in its E & P account as of January 1, 2018, is:

Which one of the following statements about property distributions is false?

Matching Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -Federal income tax refunds from tax paid in prior years.

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?

Matching Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -Cash dividends distributed to shareholders in 2017.

Matching Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -Interest received from municipal bonds in 2017.

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: