Question 1

Falcon Corporation ended its first year of operations with taxable income of $250,000.At the time of Falcon's formation,it incurred $50,000 of organizational expenses.In calculating its taxable income for the year,Falcon claimed an $8,000 deduction for the organizational expenses.What is Falcon's current E & P?

Accepted Answer

The answer of Falcon Corporation ended its first year of...

Question 2

When current E & P is positive and accumulated E & P has a deficit balance,the two accounts are netted for dividend determination purposes.

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The answer of When current E & P is positive...

Question 3

Property distributed by a corporation as a dividend is subject to a liability in excess of its basis.For purposes of determining gain on the distribution,the basis of the property is treated as being not less than the amount of liability.

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The answer of Property distributed by a corporation as a...

Question 4

Tracy and Lance,equal shareholders in Macaw Corporation,receive $600,000 each in distributions on December 31 of the current year.Macaw's current year taxable income is $1 million and it has no accumulated E & P.Last year,Macaw sold an appreciated asset for $1,200,000 (basis of $400,000).Payment for one-half of the sale of the asset was made this year.How much of Tracy's distribution will be taxed as a dividend?

Accepted Answer

The answer of Tracy and Lance,equal shareholders in Macaw Corporation,receive...

Question 5

During the year,Blue Corporation distributes land to its sole shareholder.If the fair market value of the land is less than its adjusted basis,Blue will not be able to recognize a loss on the distribution.

Accepted Answer

According to the tax law, if the fair market value of property distributed to a shareholder is less than its adjusted basis, the corporation cannot recognize a loss on the distribution. This rule is intended to prevent a corporation from recognizing an artificial loss on the distribution.

Question 6

In a property distribution,the amount of dividend income recognized by a shareholder is always reduced by the amount of liability assumed by a shareholder.

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The answer of In a property distribution,the amount of dividend...

Question 7

If there is sufficient E & P,a distribution of nonconvertible preferred stock to common shareholders is taxable.

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The answer of If there is sufficient E & P,a...

Question 8

Tern Corporation,a cash basis taxpayer,has taxable income of $500,000 for the current year.Tern elected $25,000 of § 179 expense.It also had a related party loss of $20,000 and a realized (not recognized)gain from an involuntary conversion of $75,000.It paid Federal income tax of $150,000 and paid a nondeductible fine of $10,000.Tern's current E & P is:

Accepted Answer

To calculate current E&P, we start with taxable income and make the necessary adjustments:

Taxable Income: $500,000
§ 179 Expense: ($25,000)
Related Party Loss: $20,000
Realized Gain from Involuntary Conversion: $75,000
Nondeductible Fine: ($10,000)
Total Adjustments: $60,000

Adjusted Taxable Income: $440,000

Next, we subtract the federal income tax paid:

Adjusted Taxable Income: $440,000
Federal Income Tax Paid: ($150,000)
Current E&P: $290,000

Therefore, the correct choice is (C) $340,000.

Question 9

A corporate shareholder that receives a constructive dividend cannot apply a dividends received deduction to the distribution.

Accepted Answer

The answer of A corporate shareholder that receives a constructive...

Question 10

If a stock dividend is taxable,the shareholder's basis in the newly received shares is equal to the fair market value of the shares received in the distribution.

Accepted Answer

This is true according to the tax code. When a stock dividend is taxable, the shareholder's basis in the newly received shares is equal to the fair market value of the shares received in the distribution. This means that if the shareholder later sells these shares, their gain or loss will be based on this new basis.

Question 11

Constructive dividends do not need to satisfy the legal requirements for a dividend as set forth by applicable state law.

Accepted Answer

Constructive dividends are not actual dividends but are deemed as such by the IRS for tax purposes. Therefore, they do not need to follow state law requirements for dividends.

Question 12

The tax treatment of corporate distributions at the shareholder level does not depend on:

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The answer of The tax treatment of corporate distributions at...

Question 13

Regardless of any deficit in current E & P,distributions during the year are taxed as dividends to the extent of accumulated E & P.

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The answer of Regardless of any deficit in current E...

Question 14

Constructive dividends have no effect on a distributing corporation's E & P.

Accepted Answer

Constructive dividends do affect a corporation's Earnings and Profits (E&P) because they are treated as if the corporation had declared and paid a cash dividend, thus reducing the corporation's E&P.

Question 15

A corporation that distributes a property dividend must reduce its E & P by the adjusted basis of the property less any liability on the property.

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The answer of A corporation that distributes a property dividend...

Question 16

Aaron and Michele,equal shareholders in Cavalier Corporation,receive $25,000 each in distributions on December 31 of the current year.During the current year,Cavalier sold an appreciated asset for $60,000 (basis of $15,000).Payment for the sale of the asset will be made as follows: 50% next year and 50% in the following year,with interest payable at a rate of 6 percent.Before considering the effect of the asset sale,Cavalier's current year E & P is $40,000 and it has no accumulated E & P.How much of Aaron's distribution will be taxed as a dividend?

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The answer of Aaron and Michele,equal shareholders in Cavalier Corporation,receive...

Question 17

Which of the following statements is incorrect with respect to determining current E & P?

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The answer of Which of the following statements is incorrect...

Question 18

Corporate distributions are presumed to be paid out of E & P and are treated as dividends unless the parties to the transaction can show otherwise.

Accepted Answer

This is true under the Internal Revenue Code.

Question 19

Under certain circumstances,a distribution can generate (or add to)a deficit in E & P.

Accepted Answer

The answer of Under certain circumstances,a distribution can generate (or...

Question 20

When current E & P has a deficit and accumulated E & P is positive,the two accounts are netted at the date of the distribution.If a positive balance results,the distribution is a dividend to the extent of the balance.

Accepted Answer

When current E & P has a deficit and accumulated E & P is positive, the two accounts are netted at the date of the distribution, and if a positive balance results, the distribution is considered a dividend to the extent of the balance.

Quiz 13: Corporations: Earnings Profits and Distributions