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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 21

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In June of the current year,Marigold Corporation declares a $4 dividend out of E & P on each share of common stock to shareholders of record on August 1.Ellen and Tim each purchase 100 shares of Marigold stock on July 1.On July 15,Ellen also purchases a short position in Marigold.Tim sells 50 of his shares on August 10 and continues to hold the remaining 50 shares through the end of the year.Ellen closes her short position in Marigold on October 15.With respect to the dividends,which of the following is correct?

A) Ellen will have $400 of qualifying dividends subject to reduced tax rates and $400 of ordinary income (from dividends paid on the short position of Marigold stock) .
B) Tim will have $200 of qualifying dividends subject to reduced tax rates and $200 of ordinary income.
C) All $800 of Ellen's dividends will qualify for reduced tax rates.
D) All $400 of Tim's dividends will qualify for reduced tax rates.
E) None of the above.

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

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Question 22

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Stacey and Andrew each own one-half of the stock in Parakeet Corporation,a calendar year taxpayer.Cash distributions from Parakeet are: $350,000 to Stacey on April 1 and $150,000 to Andrew on May 1.If Parakeet's current E & P is $60,000,how much is allocated to Andrew's distribution?

A) $5,000
B) $10,000
C) $18,000
D) $30,000
E) None of the above

F) A) and B)
G) B) and E)

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Question 23

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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.Jack owns 100 shares of stock in Pink,which he 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.Jack receives 50 rights.He exercises 25 rights and sells the remaining 25 rights three months later for $2.50 per right.

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?

Briefly describe the rationale for the reduced tax rate on dividends for individual taxpayers.

adjusted to arrive at current E & P for 2015. a.Increase b.Decrease c.No effect -Penalties paid to state government for failure to comply with state law.

Hawk Corporation has 2,000 shares of stock outstanding: Marina owns 800 shares,Russell owns 500 shares,Velvet Partnership owns 400 shares,and Yellow Corporation owns 300 shares.Marina and Russell,unrelated individuals,are equal partners of Velvet Partnership.Marina owns 35% of the stock in Yellow Corporation. a.Applying the § 318 stock attribution rules,determine how many shares in Hawk Corporation each shareholder owns,directly and indirectly: Marina: Russell: Velvet Partnership: Yellow Corporation: b.Assume,instead,that Marina owns 60% of Yellow Corporation.How many shares does Marina own,directly and indirectly,in Hawk Corporation?

How does the definition of accumulated E & P differ from the definition of current E & P?

Starling Corporation has accumulated E & P of $60,000 on January 1,2015.In 2015,Starling Corporation had an operating loss of $80,000.It distributed cash of $40,000 to Zoe,its sole shareholder,on December 31,2015.Starling Corporation's balance in its E & P account as of January 1,2016,is:

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 2015. a.Increase b.Decrease c.No effect -Domestic production activities deduction claimed in 2015.

Purple Corporation makes a property distribution to its sole shareholder,Paul.The property distributed is a house (fair market value of $189,000;basis of $154,000) that is subject to a $245,000 mortgage that Paul assumes.Before considering the consequences of the distribution,Purple's current E & P is $35,000 and its accumulated E & P is $140,000.Purple makes no other distributions during the current year.What is Purple's taxable gain on the distribution of the house?

Federal income tax paid in the current year must be subtracted from taxable income to determine E & P.

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?

Pheasant Corporation,a calendar year taxpayer,has $400,000 of current E & P and a deficit in accumulated E & P of $180,000.If Pheasant pays a $600,000 distribution to its shareholders on July 1,how much dividend income do the shareholders report?

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.

Brett owns stock in Oriole Corporation (basis of $100,000) as an investment.Oriole distributes property (fair market value of $375,000;basis of $187,500) to him during the year.Oriole has current E & P of $25,000 (which includes the E & P gain on the property distribution) ,accumulated E & P of $100,000,and makes no other distributions during the year.What is Brett's capital gain on the distribution?

Thistle Corporation declares a nontaxable dividend payable in rights to subscribe to common stock.One right and $25 entitle the holder to subscribe to one share of stock.One right is issued for each share of stock held.Annette,a shareholder,owns 200 shares of stock that she purchased five years ago for $3,000.At the date of distribution of the rights,the market values were $50 per share for the stock and $25 for a right.Annette received 200 rights.She exercises 160 rights and purchases 160 additional shares of stock.She sells the remaining 40 rights for $1,080.What are the tax consequences to Annette?

The adjusted gross estate of Debra,decedent,is $8 million.Debra's estate will incur death taxes and funeral and administration expenses of $1 million.Debra's gross estate includes stock in Silver Corporation that she had purchased twelve years ago for $600,000 (date of death fair market value of $3 million) .At the time of her death,Debra owned 80% of the stock in Silver Corporation.Silver Corporation (E & P of $4 million) redeems all of the estate's stock in the corporation for $3 million.Debra's will names her daughter,Dena,who owns the remaining 20% interest in Silver Corporation,as her sole heir.With respect to this redemption,Debra's estate has the following income:

Puffin Corporation makes a property distribution to its sole shareholder,Bonnie.The property distributed is a car (basis of $30,000;fair market value of $20,000) that is subject to a $6,000 liability which Bonnie assumes.Puffin has no accumulated E & P and $30,000 of current E & P from other sources during the year.What is Puffin's E & P after taking into account the distribution of the car?

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