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Exam 10: Corporations: Earnings Profits and Distributions

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Question 1

True/False

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To determine current E & P,taxable income must be increased for any domestic production activities deduction.

A) True
B) False

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True

Question 2

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Corporate shareholders generally receive less favorable tax treatment from a qualifying stock redemption than from a dividend distribution.

A) True
B) False

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Question 3

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Maria and Christopher each own 50% of Cockatoo Corporation,a calendar year taxpayer.Distributions from Cockatoo are: $750,000 to Maria on April 1 and $250,000 to Christopher on May 1.Cockatoo's current E & P is $300,000 and its accumulated E & P is $600,000.How much of the accumulated E & P is allocated to Christopher's distribution?

No E & P adjustment is required for regular tax gains under the installment method.

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.

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?

Ethel,Hannah,and Samuel,unrelated individuals,own the stock in Broadbill Corporation (E & P of $700,000) as follows: Ethel,300 shares; Hannah,300 shares; and Samuel,400 shares.Broadbill redeems 200 of Samuel's shares (basis of $175,000) for $250,000.If Samuel's stock is a capital asset and has been held for over three years,Samuel has:

Daisy Corporation is the sole shareholder of Ostrich Corporation,which it hopes to sell within the next three years.The Ostrich stock (basis of $25 million)is currently worth $30 million,but Daisy believes that it would be easier to find a buyer if it was worth less.To lower the value of its stock,Ostrich distributes $4 million cash to Daisy (sufficient E & P exists to cover the distribution).At a later date,Daisy sells Ostrich for $26 million.

As a general rule,a liquidating corporation recognizes gains but not losses on the distribution of property in complete liquidation.

Tangelo Corporation has an August 31 year-end.Tangelo had $50,000 in accumulated E & P at the beginning of its 2014 fiscal year (September 1,2013) and during the year,it incurred a $75,000 operating loss.It also distributed $65,000 to its sole shareholder,Cass,on November 30,2013.If Cass is a calendar year taxpayer,how should she treat the distribution when she files her 2013 income tax return (assuming the return is filed by April 15,2014) ?

As a result of a redemption,a shareholder's interest (direct and indirect)in the corporation decreased from 80% to 55%.The redemption qualifies for sale or exchange treatment as a disproportionate redemption.

Ashley,the sole shareholder of Hawk Corporation,has a stock basis of $200,000 at the beginning of the year.On July 1,she sells all of her stock to Matt for $1 million.On January 1,Hawk has accumulated E & P of $90,000 and during the year,current E & P of $160,000.Hawk makes the following cash distributions: $270,000 to Ashley on March 31 and $90,000 to Matt on December 1.How are the distributions taxed to Ashley and Matt? What is Ashley's recognized gain on the sale to Matt?

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

Lena is the sole shareholder and president of Gold Corporation.She feels that she can justify at least a $50,000 bonus this year because of her performance for the company.However,rather than a bonus in the form of a salary,she considers having Gold pay her a $50,000 dividend.She believes this would be preferable because it will be taxed at only 15% instead of her marginal rate of 35%.Her CPA has advised her to pay a $75,000 bonus in lieu of the $50,000 dividend.Assuming that Gold Corporation is in a 34% tax bracket,should Lena take the $50,000 dividend or the $75,000 bonus? Support your answer by computing the after-tax cost of the two alternatives to Gold and to Lena.

Scarlet Corporation is an accrual basis,calendar year corporation.Scarlet distributes inventory (basis of $20,000; fair market value of $40,000)to Frank,its shareholder.Assuming that Scarlet has $500,000 of current E & P,what is the impact of the distribution on Scarlet Corporation and on Frank?

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?

Tanya is in the 33% tax bracket.She acquired 1,000 shares of stock in Swan Corporation seven years ago for $100 a share.In the current year,Swan Corporation (E & P of $1.2 million)redeems all of her shares for $160,000.What are the income tax consequences to Tanya if:

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

Distributions that are not dividends are a return of capital and decrease the shareholder's basis.

A deficit in current E & P is treated as occurring ratably during the year,unless the taxpayer can show otherwise.