Question 1

Identify which of the following statements is true.
A)Loans made to shareholders in proportion to their stock ownership in the corporation is evidence that the loans are disguised dividends.
B)Corporate payments for the shareholder's benefit may be a taxable dividend.
C)If the shareholder can elect to receive distributing corporation stock or money,the receipt of distributing corporation stock will be a taxable dividend.
D)All of the above are true.

Accepted Answer

A) According to the constructive dividend doctrine, loans made to shareholders that are not treated as a loan in substance but instead are similar to a dividend paid to the shareholder can be subjected to taxation as a dividend. 
B) Any payment by a corporation for the benefit of a shareholder may be considered a taxable dividend if it is distributed out of earnings and profits. 
C) If a shareholder has the option to receive either distributing corporation stock or money, the receipt of stock will be considered a taxable dividend to the extent of the corporation's earnings and profits.

Question 2

A corporation distributes land and the related liability in a nonliquidating distribution to a shareholder.The land (a capital asset)has an adjusted basis of $70,000,an FMV of $100,000 and is subject to a mortgage of $120,000.The corporation must recognize
A)a $20,000 capital loss.
B)a $50,000 capital gain.
C)a $70,000 capital gain.
D)no gain or loss.

Accepted Answer

The corporation must recognize a $50,000 capital gain, which is the difference between the fair market value (FMV) of the land ($100,000) and its adjusted basis ($70,000). The liability exceeding the FMV does not affect the calculation of gain for the corporation in this context.

Question 3

Digger Corporation has $50,000 of current and accumulated E&P.On March 1,Digger distributes land with a $30,000 FMV and a $17,500 adjusted basis to Dave,its sole shareholder.The land is subject to a $5,000 liability which Dave assumes.
a)What are the amount and character of the distribution?
b)What is Dave's basis in the property?
c)When does his holding period for the property begin?

Accepted Answer

The answer of Digger Corporation has $50,000 of current and...

Question 4

Tia owns 2,000 shares of Bass Corporation common stock with an $80,000 basis.Bass distributes a nontaxable preferred stock dividend.When the preferred stock is distributed,it has an FMV of $60,000 and the FMV of the 2,000 common stock shares is $180,000.The basis of the preferred stock is
A)$0.
B)$20,000.
C)$60,000.
D)$80,000.

Accepted Answer

According to IRC section 305, the basis of the common stock is allocated between the common and preferred stock received. Therefore, Tia's basis in the preferred stock is equal to the FMV of the preferred stock (i.e., $60,000). The basis of her common stock shares is then adjusted to $20,000 ((($80,000 basis / $260,000 total FMV) * $180,000 FMV of common stock) - $60,000 FMV of preferred stock).

Question 5

What is a constructive dividend? Under what circumstances are constructive dividends most likely to arise?

Accepted Answer

The answer of What is a constructive dividend? Under what...

Question 6

An individual shareholder owns 3,000 shares of Baxter Corporation common stock with a basis of $10 per share.She receives a nontaxable 5% stock dividend.The basis per share of the common stock after the stock dividend is
A)$9.00.
B)$9.50.
C)$9.52.
D)$10.00.

Accepted Answer

The answer of An individual shareholder owns 3,000 shares of...

Question 7

John,the sole shareholder of Photo Specialty Corporation has had an exceptional year.He is considering issuing himself a large bonus in lieu of a dividend.You are concerned about unreasonable compensation.What issues must be considered?

Accepted Answer

The answer of John,the sole shareholder of Photo Specialty Corporation...

Question 8

Maple Corporation distributes land to a noncorporate shareholder.Explain how the following items are computed:
a)The amount of the distribution.
b)The amount of the dividend.
c)The basis of the land to the shareholder.
d)The start of the holding period for the land.
How would your answers change if the distribution was made to a corporate shareholder?

Accepted Answer

The answer of Maple Corporation distributes land to a noncorporate...

Question 9

Identify which of the following statements is true.
A)The FMV of an obligation is used to determine the E&P reduction when a corporation distributes the obligation to its shareholders.
B)When appreciated property is distributed to shareholders,E&P must be increased by any gain (net of taxes)recognized due to the property distribution.
C)When appreciated property is distributed in a nonliquidating distribution,the net effect on the distributing corporation's E&P is that it is reduced by the net of the FMV of the property distributed minus the gain (net of federal income taxes)recognized due to the property distribution.
D)Only B and C above are true.

Accepted Answer

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

Question 10

A corporation distributes land and the related liability to Meg,its sole shareholder.The land has an FMV of $60,000 and is subject to a liability of $70,000.The corporation has current and accumulated E&P of $80,000.The corporation's adjusted basis for the property is $70,000.What effect does the transaction have on the corporation?
A)A recognized loss of $10,000;its E&P is reduced by $70,000.
B)A recognized loss of $10,000;its E&P is unchanged.
C)No recognized gain or loss;its E&P is reduced by $60,000.
D)No recognized gain or loss;its E&P is unchanged by the distribution.

Accepted Answer

The answer of A corporation distributes land and the related...

Question 11

White Corporation is a calendar-year taxpayer.Wilhelmina owns all of its stock.Her basis for the stock is $25,000.On March 1 of the current year (not a leap year),White Corporation distributes $60,000 to Wilhelmina.Determine the tax consequences of the cash distribution to Wilhelmina in each of the following independent situations:
a)Current E&P $15,000,accumulated E&P $50,000.
b)Current E&P $25,000,accumulated E&P $(25,000).
c)Current E&P ($36,500),accumulated E&P $65,000.
d)Current E&P ($10,000),accumulated E&P $(25,000.

Accepted Answer

The answer of White Corporation is a calendar-year taxpayer.Wilhelmina owns...

Question 12

Jerry purchased land from Winter Harbor Corporation,his 100%-owned corporation,for $275,000.The corporation purchased the land three years ago for $300,000.Similar tracts of land located nearby have sold for $400,000 in recent months.What tax issues should be considered with respect to the corporation's sale of the land?

Accepted Answer

The answer of Jerry purchased land from Winter Harbor Corporation,his...

Question 13

In the current year,Red Corporation has $100,000 of current and accumulated E&P.On March 2,Red Corporation distributes to Randy,a shareholder,a parcel of land (a capital asset)having a $60,000 FMV.The land has a $30,000 adjusted basis (for both tax and E&P purposes)to Red Corporation and is subject to an $8,000 mortgage,which Randy assumes.Assume a 34% marginal corporate tax rate.
a)What is the amount and character of the income Randy recognizes as a result of the distribution?
b)What is Randy's basis for the land?
c)What is the amount and character of Red Corporation's gain or loss as a result of the distribution?
d)What effect does the distribution have on Red Corporation's E&P?

Accepted Answer

The answer of In the current year,Red Corporation has $100,000...

Question 14

In a nontaxable distribution of stock rights,when the value of the rights is less than 15% of the value of the stock with respect to which the rights were distributed,the basis of the rights is zero unless the shareholder elects to allocate stock basis to the rights.

Accepted Answer

According to IRS publication 550, if the value of stock rights is less than 15% of the value of the stock, the basis of the rights is generally considered zero unless the shareholder elects to allocate stock basis to the rights. This is because the distribution is considered nontaxable.

Question 15

Bat Corporation distributes stock rights with a $20,000 FMV to its common stock shareholders.The $20,000 value of the stock rights at the time of distribution is less than 15% of the value of the underlying stock.Which of the following statements is true?
A)A shareholder must allocate basis to the rights based on the relative FMVs of the stock and the rights.
B)A shareholder cannot allocate any basis to the rights.
C)The basis in the rights is zero unless a shareholder makes a valid election to allocate basis to the rights.
D)The holding period for the rights begins on the day the rights are distributed in all cases.

Accepted Answer

Since the value of the stock rights is less than 15% of the value of the underlying stock, the distribution is considered a de minimis distribution. In this case, the basis in the rights is zero unless the shareholder makes a valid election to allocate basis to the rights.

Question 16

Gould Corporation distributes land (a capital asset)worth $90,000 to Gerry,a shareholder.The land has a $30,000 basis to Gould.What is the amount and character of the gain or loss recognized by Gould?

Accepted Answer

The answer of Gould Corporation distributes land (a capital asset)worth...

Question 17

Strong Corporation is owned by a group of 20 shareholders.During the current year,Strong Corporation pays $225,000 in salary and bonuses to Stedman,its president and controlling shareholder.The IRS audits Strong's tax return and determines that reasonable compensation for Stedman would be $125,000.Strong Corporation agrees to the adjustment.
a)What effect does the disallowance of part of the deduction for Stedman's salary and bonuses have on Strong Corporation and Stedman?
b)What tax savings could have been obtained by Strong Corporation and Stedman if an agreement had been in effect that required Stedman to repay Strong Corporation any amounts determined by the IRS to be unreasonable?

Accepted Answer

The answer of Strong Corporation is owned by a group...

Question 18

In a taxable distribution of stock,the recipient shareholder takes a basis equal to the FMV of the stock received.

Accepted Answer

When a shareholder receives a taxable distribution of stock, they take a basis equal to the fair market value (FMV) of the stock received. This means that if they were to later sell the stock, their capital gain or loss would be calculated based on the difference between the FMV at the time of distribution and the sale price.

Question 19

Which of the following transactions does not have the potential of creating a constructive dividend?
A)compensation paid by a corporation to a shareholder-employee
B)purchase of corporate property by the shareholder
C)shareholder's rental of corporate property
D)All of the above can result in a constructive dividend.

Accepted Answer

All of the options listed can potentially result in a constructive dividend. This occurs when a corporation provides a benefit to a shareholder that can be considered equivalent to a dividend, even if it's not explicitly labeled as such. Compensation to a shareholder-employee, purchase of corporate property by a shareholder, and a shareholder's rental of corporate property can all be scrutinized for being more favorable than what would be expected in an arm's length transaction, thus potentially being classified as constructive dividends.

Question 20

In the current year,Pearl Corporation has $300,000 of current and accumulated E&P.On June 3,Pearl Corporation distributes a parcel of land (a capital asset)worth $120,000 to Betty,a shareholder.The land has a $60,000 adjusted basis to Pearl Corporation and is subject to a $16,000 mortgage,which Betty assumes.Assume a 34% marginal corporate tax rate.
a)What is the amount and character of the income recognized by Betty as a result of the distribution?
b)What is Betty's basis for the land?
c)What is the amount and character of Pearl's gain or loss as a result of the distribution?
d)What effect does the distribution have on Pearl's E&P?

Accepted Answer

The answer of In the current year,Pearl Corporation has $300,000...

Quiz 4: Corporate Nonliquidating Distributions

Identify which of the following statements is true.

A corporation distributes land and the related liability in a nonliquidating distribution to a shareholder.The land (a capital asset) has an adjusted basis of $70,000,an FMV of $100,000 and is subject to a mortgage of $120,000.The corporation must recognize

Tia owns 2,000 shares of Bass Corporation common stock with an $80,000 basis.Bass distributes a nontaxable preferred stock dividend.When the preferred stock is distributed,it has an FMV of $60,000 and the FMV of the 2,000 common stock shares is $180,000.The basis of the preferred stock is

What is a constructive dividend? Under what circumstances are constructive dividends most likely to arise?

An individual shareholder owns 3,000 shares of Baxter Corporation common stock with a basis of $10 per share.She receives a nontaxable 5% stock dividend.The basis per share of the common stock after the stock dividend is

John,the sole shareholder of Photo Specialty Corporation has had an exceptional year.He is considering issuing himself a large bonus in lieu of a dividend.You are concerned about unreasonable compensation.What issues must be considered?

Identify which of the following statements is true.

In a nontaxable distribution of stock rights,when the value of the rights is less than 15% of the value of the stock with respect to which the rights were distributed,the basis of the rights is zero unless the shareholder elects to allocate stock basis to the rights.

Bat Corporation distributes stock rights with a $20,000 FMV to its common stock shareholders.The $20,000 value of the stock rights at the time of distribution is less than 15% of the value of the underlying stock.Which of the following statements is true?

Gould Corporation distributes land (a capital asset)worth $90,000 to Gerry,a shareholder.The land has a $30,000 basis to Gould.What is the amount and character of the gain or loss recognized by Gould?

In a taxable distribution of stock,the recipient shareholder takes a basis equal to the FMV of the stock received.

Which of the following transactions does not have the potential of creating a constructive dividend?