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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 41

True/False

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Use of MACRS cost recovery when computing taxable income does not require an E & P adjustment.

A) True
B) False

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Question 42

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Silver Corporation, a calendar year taxpayer, has taxable income of $550,000. Among its transactions for the year are the following: $\begin{array}{lr}\text { Collection of proceeds from insurance policy on life of corporate }\\\text { officer (in excess of cash surrender value) } & \$ 82,500 \\\text { Realized gain (not recognized) on an involuntary conversion } & 11,000 \\\text { Nondeductible fines and penalties } & 44,000\end{array}$ Disregarding any provision for Federal income taxes, Silver Corporation's current E & P is:

A) $500,500.
B) $588,500.
C) $599,500.
D) $687,500.
E) None of these.

F) B) and E)
G) C) and D)

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Question 43

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Puffin Corporation's 2,000 shares outstanding are owned as follows: Paul, 800 shares; Sandra (Paul's sister), 800 shares; and Greta (Paul's granddaughter), 400 shares. During the current year, Puffin (E & P of $1 million) redeemed 600 shares of Paul's stock for $100,000. If Paul acquired the 600 shares five years ago for $30,000, he will have a long-term capital gain of $70,000 from the redemption.

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

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 2019. -Additional first-year (bonus) depreciation deduction claimed in 2019.

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?

To determine E & P, some (but not all) previously excluded income items are added back to taxable income.

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?

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 2019. -State income tax paid in the current year.

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

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.

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

Rust Corporation distributes property to its sole shareholder, Andre. The property has a fair market value of $350,000, an adjusted basis of $205,000, and is subject to a liability of $220,000. Current E & P is $500,000. With respect to the distribution, which of the following statements is correct?

For purposes of a partial liquidation, the termination of a business test is a subjective test that should be relied upon only after obtaining a favorable ruling from the IRS.

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

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 2019. -Proceeds of life insurance received upon the death of a key employee (policy had no cash surrender value) .

What is a constructive dividend? Provide several examples of the term.

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 2019. -Loss on sale between related parties in 2019.

Keshia owns 200 shares in Parakeet Corporation. Keshia has a 30% beneficiary interest in her deceased grandmother's estate. The estate owns 400 shares in Parakeet Corporation. None of the other beneficiaries of the estate owns stock in Parakeet. In applying the § 318 attribution rules:

Finch Corporation (E & P of $400,000) distributed machinery ($10,000 adjusted basis, $150,000 fair market value) to its sole shareholder, Kathleen. The property is subject to a $50,000 mortgage, which Kathleen assumed. How much dividend income does Kathleen recognize as a result of the distribution and what is her basis in the machinery?