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Exam 5: Corporations: Earnings and Profits and Dividend Distributions

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Question 21

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

A) True
B) False

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Question 22

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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.

A) True
B) False

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Question 23

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Nondeductible meal expense must be subtracted from taxable income to determine current E & P.

Which one of the following statements is false?

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. -Penalties paid to state government for failure to comply with state law.

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

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

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.

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.

When computing E & P, taxable income is not adjusted for § 179 expense.

Which one of the following statements about property distributions is false?

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:

Robin Corporation, a calendar year taxpayer, has a deficit in current E & P of $200,000 and a $580,000 positive balance in accumulated E & P. If Robin determines that a $700,000 distribution to its shareholders is appropriate at some point during the year, what is the maximum amount of the distribution that could potentially be treated as a dividend?

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

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

Pink Corporation declares a nontaxable dividend payable in rights to subscribe to common stock. Each right entitles the holder to purchase one share of stock for $25. One right is issued for every two shares of stock owned. Jocelyn owns 100 shares of stock in Pink, which she purchased three years ago for $3,000. At the time of the distribution, the value of the stock is $45 per share and the value of the rights is $2 per share. Jocelyn receives 50 rights. She exercises 25 rights and sells the remaining 25 rights three months later for $2.50 per right.

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. -Gain realized but not recognized in a like-kind exchange transaction in 2019.

Glenda is the sole shareholder of Condor Corporation. She sold her stock to Melissa on October 31 for $150,000. Glenda's basis in Condor stock was $50,000 at the start of the year. Condor distributed land to Glenda immediately before the sale. Condor's basis in the land was $20,000 fair market value of $25,000) . On December 31, Melissa received a $75,000 cash distribution from Condor. During the year, Condor has $20,000 of current E & P and its accumulated E & P balance on January 1 is $10,000. Which of the following statements is true?

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.

Christian, the president and sole shareholder of Venture Corporation, is paid an annual salary of $150,000. Christian would like to draw additional funds from the corporation but is concerned that an increased salary might cause the IRS to contend that his salary is unreasonable. Further, Christian does not want the corporation to pay any dividends. He would like to contribute $40,000 to his alma mater to establish scholarships for needy students. If Christian makes a pledge to the university to provide $40,000 for scholarships, would there be a problem if Venture Corporation paid the pledge on his behalf? Explain.