Question 1

Au Sable Corporation reported taxable income of $800,000 in 20X3 and paid federal income taxes of $272,000. Not included in the computation was a disallowed penalty of $25,000, life insurance proceeds of $100,000, and a Federal income tax refund from 20X2 of $50,000. Au Sable is an accrual basis taxpayer. The corporation's current earnings and profits for 20X3 would be:

Accepted Answer

$800,000 - $272,000 - $25,000 + $100,000 = $603,000. The refund is not added back because Au Sable is on the accrual method.

Question 2

Which of these items is not an adjustment to taxable income or net loss to compute current E&P?

Accepted Answer

Refunds of prior year taxes are included in the computation of current E&P under the cash method of accounting.

Question 3

Oakland Corporation reported a net operating loss of $500,000 in 20X3 and elected to carry the loss forward to 20X4. Not included in the computation was a disallowed meals and entertainment expense of $20,000, tax-exempt income of $10,000, and deferred gain on a current year transaction treated as an installment sale of $250,000. The corporation's current earnings and profits for 20X3 would be:

Accepted Answer

($500,000) - $20,000 + $10,000 + $250,000 = ($260,000).

Question 4

Packard Corporation reported taxable income of $1,000,000 in 20X3 and paid federal income taxes of $340,000. Included in the taxable income computation was a dividends received deduction of $5,000, a net capital loss carryover from 20X2 of $10,000 utilized in 20X3, and gain of $50,000 recognized on the collection of cash from an installment sale that took place in 20X1. The corporation's current earnings and profits for 20X3 would be:

Accepted Answer

$1,000,000 - $340,000 + $5,000 + $10,000 - $50,000 = $625,000.

Question 5

Which of the following statements best describes the priority of the tax treatment of a distribution from a corporation to a shareholder?

Accepted Answer

The tax treatment is specified in §301(c).

Question 6

A calendar-year corporation has negative current E&P of $500 and accumulated positive E&P of $1,000. The corporation makes a $600 distribution to its sole shareholder. Which of the following statements is True?

Accepted Answer

When current E&P is negative, the status of a distribution is determined based on accumulated E&P at the date of the distribution.

Question 7

Which of the following statements best describes current earnings and profits?

Accepted Answer

Current earnings and profits more accurately describes economic income (at least compared to taxable income) and is only partially defined in the Internal Revenue Code.

Question 8

Which of the following forms of earnings distributions would not be subject to double taxation at the corporate and shareholder level?

Accepted Answer

Compensation is deductible at the corporate level.

Question 9

Siblings are considered "family" under the stock attribution rules that apply to stock redemptions.

Accepted Answer

Only a spouse, children, grandchildren, and parents are considered "family." See IRC Section 318.

Question 10

A distribution in partial liquidation of a corporation is always treated as a sale or exchange by an individual shareholder.

Accepted Answer

According to the IRS, a distribution in partial liquidation of a corporation is treated as a sale or exchange by an individual shareholder, even if the corporation does not completely liquidate.

Question 11

Grand River Corporation reported taxable income of $500,000 in 20X3 and paid federal income taxes of $170,000. Not included in the computation was a disallowed meals and entertainment expense of $2,000, tax-exempt income of $1,000, and deferred gain on a current year transaction treated as an installment sale of $25,000. The corporation's current earnings and profits for 20X3 would be:

Accepted Answer

$500,000 - $170,000 - $2,000 + $1,000 + $25,000 = $354,000.

Question 12

Diego owns 30 percent of Azul Corporation. Azul Corporation owns 50 percent of Verde Corporation. Under the attribution rules applying to stock redemptions, Diego is treated as owning 15 percent of Verde Corporation.

Accepted Answer

The corporation to shareholder attribution rule only applies if Diego owns 50 percent or more of Azul Corporation.

Question 13

Madison Corporation reported taxable income of $400,000 in 20X3 and accrued federal income taxes of $136,000. Included in the computation of taxable income was regular depreciation of $200,000 (E&P depreciation is $60,000) and a net capital loss carryover of $20,000 from 20X2 utilized in 20X3. The corporation's current earnings and profits for 20X3 would be:

Accepted Answer

$400,000 - $136,000 + $140,000 + $20,000 = $424,000. The capital loss carryover reduced E&P in 20X2.

Question 14

The "family attribution" rules are automatically waived in a complete redemption of a shareholder's stock.

Accepted Answer

The shareholder must sign a "triple i" agreement with the IRS to waive the family attribution rules in a complete redemption.

Question 15

Greenwich Corporation reported a net operating loss of $800,000 in 20X3, which the corporation elected to carryforward to 20X4. The computation of the loss did not include a disallowed fine of $50,000, life insurance proceeds of $500,000, and a current year charitable contribution of $10,000 that will be carried forward to 20X4. The corporation's current earnings and profits for 20X3 would be:

Accepted Answer

($800,000) - $50,000 + $500,000 - $10,000 = ($360,000).

Question 16

Abbot Corporation reported a net operating loss of $400,000 in 20X3, which the corporation elected to carryforward to 20X4. Included in the computation of the taxable loss was regular depreciation of $100,000 (E&P depreciation is $40,000), first year expensing under §179 of $50,000, and a dividends received deduction of $10,000. The corporation's current earnings and profits for 20X3 would be:

Accepted Answer

($400,000) + $60,000 + $40,000 + $10,000 = ($290,000). The first year expensing under §179 must be capitalized and amortized over 5 years ($10,000 per year).

Question 17

A calendar-year corporation has positive current E&P of $500 and accumulated negative E&P of $1,200. The corporation makes a $400 distribution to its sole shareholder. Which of the following statements is True?

Accepted Answer

Distributions are first treated as paid out of current earnings and profits.

Question 18

Which of the following statements best describes the role of current and accumulated earnings and profits in determining if a distribution is a dividend?

Accepted Answer

Distributions are first treated as paid out of current earnings and profits.

Question 19

Which statement best describes the concept of the "double taxation" of corporation income?

Accepted Answer

The double taxation of corporate income refers to the taxation of such income at the corporate level and then at the shareholder level when such income is distributed as a dividend.

Question 20

Battle Corporation redeems 20 percent of its stock for $100,000 in a stock redemption that is treated as an exchange by the shareholders. Battle's E&P at the date of the redemption is $200,000. Battle must reduce its earnings and profits by $100,000 because of the redemption.

Accepted Answer

Battle reduces its E&P by the lesser of $100,000 or 20% of E&P at the date of the redemption ($40,000).

Quiz 7: Corporate Taxation: Nonliquidating Distributions

Which of these items is not an adjustment to taxable income or net loss to compute current E&P?

Which of the following statements best describes the priority of the tax treatment of a distribution from a corporation to a shareholder?

A calendar-year corporation has negative current E&P of $500 and accumulated positive E&P of $1,000. The corporation makes a $600 distribution to its sole shareholder. Which of the following statements is True?

Which of the following statements best describes current earnings and profits?

Which of the following forms of earnings distributions would not be subject to double taxation at the corporate and shareholder level?

Siblings are considered "family" under the stock attribution rules that apply to stock redemptions.

A distribution in partial liquidation of a corporation is always treated as a sale or exchange by an individual shareholder.

Diego owns 30 percent of Azul Corporation. Azul Corporation owns 50 percent of Verde Corporation. Under the attribution rules applying to stock redemptions, Diego is treated as owning 15 percent of Verde Corporation.

The "family attribution" rules are automatically waived in a complete redemption of a shareholder's stock.

A calendar-year corporation has positive current E&P of $500 and accumulated negative E&P of $1,200. The corporation makes a $400 distribution to its sole shareholder. Which of the following statements is True?

Which of the following statements best describes the role of current and accumulated earnings and profits in determining if a distribution is a dividend?

Which statement best describes the concept of the "double taxation" of corporation income?

Battle Corporation redeems 20 percent of its stock for $100,000 in a stock redemption that is treated as an exchange by the shareholders. Battle's E&P at the date of the redemption is $200,000. Battle must reduce its earnings and profits by $100,000 because of the redemption.