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Exam 13: Earnings Profits and Distributions

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Question 31

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

A) The character of the property being distributed.
B) The earnings and profits of the corporation.
C) The basis of stock in the hands of the shareholder.
D) Whether the distributed property is received by an individual or a corporation.
E) None of the above.

F) A) and B)
G) B) and C)

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Question 32

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The built-in loss limitation in a complete liquidation does not apply to losses attributable to a decline in a property's fair market value after its transfer to the corporation.

A) True
B) False

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Question 33

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How does the payment of a property dividend affect E & P?

As of January 1, Cassowary Corporation has a deficit in accumulated E & P of $100,000.For the tax year, current E & P (accrued ratably) is $240,000 (prior to any distributions) .On July 1, Cassowary Corporation distributes $275,000 to its sole shareholder.The amount of the distribution that is a dividend is:

Blue Corporation has a deficit in accumulated E & P of $300,000 and has current E & P of $225,000.On July 1, Blue distributes $250,000 to its sole shareholder, Sam, who has a basis in his stock of $52,500.As a result of the distribution, Sam has:

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.

All cash distributions received from a corporation with a positive balance in accumulated E & P at the beginning of the year will be taxed as dividend income.

Goldfinch Corporation distributes stock rights to its shareholders.How is the basis of the stock rights received by Goldfinch's shareholders determined?

The terms "earnings and profits" and "retained earnings" are identical in meaning.

Gold Corporation has accumulated E & P of $2 million as of January 1 of the current year.During the year, it expects to have earnings from operations of $1,680,000 and to distribute $900,000 in cash to shareholders.Gold Corporation also expects to sell an asset for a loss of $2 million.Thus, it anticipates incurring a deficit of $320,000 for the year.What can Gold do to minimize the amount of dividend income to its shareholders?

Distributions by a corporation to its shareholders are presumed to be a dividend unless the parties can prove otherwise.

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.

Briefly define the term "earnings and profits."

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

Nondeductible meal and entertainment expenses must be subtracted from taxable income to determine current E & P.

Starling Corporation has accumulated E & P of $60,000 on January 1, 2017.In 2017, Starling Corporation had an operating loss of $80,000.It distributed cash of $40,000 to Zoe, its sole shareholder, on December 31, 2017.Starling Corporation's balance in its E & P account as of January 1, 2018, is:

Matching Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -Gain on installment sale in 2017 deferred until 2018.

Rose Corporation (a calendar year taxpayer) has taxable income of $300,000, and its financial records reflect the following for the year. $\begin{array}{lr}\text { Federal income taxes paid } & \$ 110,000 \\\text { Net operating loss carry forward deducted currently } & 70,000 \\\text { Gain recognized this year on an installment sale from a prior year } & 44,000 \\\text { Depreciation deducted on tax return (ADS depreciation woul d have been } \$ 10,000) & 40,000\\\text { Interest income on Iowa state bonds } & 8,000\end{array}$ ? Rose Corporation's current E & P is:

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.

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. ​ -Penalties paid to state government for failure to comply with state law.