Question 1

Identify which of the following increases Earnings & Profits.
A)a capital contribution
B)life insurance proceeds payable to the spouse
C)tax-exempt interest income
D)All of the above increase E&P of a corporation.

Accepted Answer

Tax-exempt interest income increases a corporation's Earnings and Profits (E&P) because it is income that is not subject to federal income tax but still increases the corporation's ability to pay dividends to its shareholders.

Question 2

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

Accepted Answer

Corporate distributions that exceed earnings and profits may not always be capital gains. They could be treated as a return of capital and reduce the shareholder's cost basis. Alternatively, they could be treated as ordinary income if they are a distribution of accumulated earnings and profits from prior years.

Question 3

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

Accepted Answer

At formation, a corporation's E&P does not depend on the amount of capital contributed by the shareholders. Instead, it is initially determined by the corporation's taxable income.

Question 4

Identify which of the following statements is true.
A)Section 179 property must be expensed ratably over a five-year period when computing E&P.
B)Losses on property sales to related parties are not deductible when computing E&P.
C)Distributions made out of accumulated E&P are allocated ratably between multiple distributions made during the tax year.
D)All of the above are false.

Accepted Answer

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

Question 5

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?
A)$0
B)($10,000)
C)$10,000
D)none of the above

Accepted Answer

Since Tomika Corporation had $0 in current and accumulated earnings and profits before the distribution, the distribution of $10,000 does not change the earnings and profits balance. Earnings and profits are not directly decreased by distributions; instead, distributions are made from earnings and profits. With none available, the distribution does not create a negative balance but is considered a return of capital or a capital gain to the shareholder.

Question 6

For purposes of determining current E&P, which of the following items cannot be deducted in the year incurred?
A)charitable contribution in excess of the 10% limitation
B)capital losses in excess of capital gains
C)life insurance premiums (in excess of the increase in cash surrender value for the policy)paid on the lives of key employees
D)dividends-received deduction

Accepted Answer

The dividends-received deduction is a deduction for dividends received by a corporation from other domestic corporations. It reduces taxable income and is not taken into account for the calculation of E&P. The other items listed are deductions that are taken into account for the calculation of E&P.

Question 7

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 answer of Omega Corporation is formed in 2006. Its...

Question 8

Current E&P does not include
A)tax-exempt interest income.
B)life insurance proceeds where the corporation is the beneficiary.
C)federal income tax refunds from prior years.
D)All of the above are included.

Accepted Answer

All of the options listed (tax-exempt interest income, life insurance proceeds where the corporation is the beneficiary, and federal income tax refunds from prior years) are included in current E&P.

Question 9

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 10

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
A)$5,000.
B)$15,000.
C)$20,000.
D)$60,000.

Accepted Answer

The amount of the distribution in excess of the shareholder's basis is treated as a capital gain. In this case, Harley's basis is $20,000, so the distribution of $60,000 would result in a capital gain of $40,000. Therefore, Harley's new basis would be $20,000 (original basis) + $40,000 (capital gain) = $60,000.

Question 11

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
A)$0.
B)$8,600.
C)$43,000.
D)$100,000.

Accepted Answer

When a noninventory item is sold on an installment basis, the gain is recognized and included in E&P in proportion to the percentage of the installment payments actually received during the year. In this case, the gain is $43,000 ($100,000 - $57,000). Since the installment payments are made over five years, 20% of the gain will be included in E&P each year. Therefore, the increase in E&P for the year of sale will be $8,600 ($43,000 x 20%).

Question 12

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
A)$0.
B)$7,000.
C)$5,000.
D)$12,000.

Accepted Answer

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

Question 13

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 14

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

How does a shareholder classify a distribution for tax purposes?

Accepted Answer

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

Question 16

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
A)$4,100 dividend and a $6,900 capital gain.
B)$11,000 return of capital.
C)$4,100 dividend and a $6,900 tax free return of capital.
D)$8,000 dividend and a $3,000 return of capital.

Accepted Answer

Since the corporation started with an E&P of $8,000 and then incurred a deficit of $18,250, it has a negative E&P for the year. The distribution of $11,000 first applies against the positive beginning E&P, resulting in a $4,100 dividend. The remaining $6,900 reduces the shareholder's basis in the stock, but since the basis is $9,000, this portion is a tax-free return of capital, not a capital gain.

Question 17

In 2010, Tru Corporation deducted $5,000 of bad debts. It received no tax benefit from the deduction because it had an 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 18

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 19

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
A)$1,500.
B)$3,000.
C)$14,000.
D)$15,000.

Accepted Answer

The deduction allowed under Sec. 179 is limited to $25,000 for tax years beginning in 2015 and is phased out dollar for dollar once $200,000 of qualifying property is placed in service. Since the corporation expensed the full cost of the equipment under Sec. 179, the deduction for E&P purposes is also $15,000. However, since the equipment has a seven-year class life, the corporation would have been able to take depreciation deductions over the next seven years if they had not elected to expense the entire cost under Sec. 179. Therefore, the deduction is not the full $15,000 but rather the amount that would have been allowed if the corporation had not made the Sec. 179 election, which is $15,000/7 = $2,142.86. However, since the question only asks for the deduction in the year of purchase, the answer is $3,000, which is the maximum amount that can be expensed under Sec. 179 for tax year 2015.

Question 20

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

Section 179 property must be expensed ratably over a five-year period when computing E&P, as stated in IRS regulations.

Quiz 4: Corporate Nonliquidating Distributions

Identify which of the following increases Earnings & Profits.

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

Identify which of the following statements is false.

Identify which of the following statements is true.

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?

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

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?

Current E&P does not include

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

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

How does a shareholder classify a distribution for tax purposes?

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

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

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.