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Exam 5: Corporations: Earnings and Profits and Dividend Distributions

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Question 21

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Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to determine current E & P for 2008. a.Increase b.Decrease c.No effect -Intangible drilling costs deducted currently.

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Question 22

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Mulberry Corporation has an August 31 year-end.Mulberry had $50,000 in accumulated E & P at the beginning of its 2009 fiscal year (September 1,2008) and during the year,it incurred a $75,000 operating loss.It also distributed $65,000 to its sole shareholder,Charles,on November 30,2008.If Charles is a calendar year taxpayer,how should he treat the distribution when he files his 2008 income tax return (assuming the return is filed by April 15,2009) ?

A) The distribution has no effect on Charles in the current year.
B) $50,000 of dividend income and $15,000 recovery of capital.
C) $60,000 of dividend income and $5,000 recovery of capital.
D) $65,000 of dividend income.
E) None of the above.

F) B) and E)
G) None of the above

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Question 23

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Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to determine current E & P for 2008. a.Increase b.Decrease c.No effect -Dividends received deduction.

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

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

Rosie,the sole shareholder of Eagle Corporation,has a stock basis of $100,000 at the beginning of the year.On July 1,she sells all of her stock to Manuel for $500,000.On January 1,Eagle has accumulated E & P of $45,000 and during the year,current E & P of $80,000.Eagle makes the following cash distributions: $90,000 to Rosie on March 31 and $90,000 to Manuel on November 1.How are the distributions taxed to Rosie and Manuel? What is Rosie's recognized gain on the sale to Manuel?

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

Cayenne Corporation,an accrual basis taxpayer,has struggled to survive since its formation,six years ago.As a result,it has a deficit in accumulated E & P at the beginning of the year of $310,000.This year,however,the tide was turned and Cayenne earned a significant profit; taxable income was $210,000.To celebrate,Cayenne made two cash distributions to Marty,its sole shareholder.The first distribution,$130,000,was made on July 1.The second distribution,$180,000,was paid on December 31.Cayenne's accountant has provided you with the following information that she thinks might be relevant to determining the tax treatment of the distributions. a.Compute Cayenne's E & P for the year using the above information. b.What are the tax consequences of the two distributions made during the year to Marty? Assume Marty's stock basis is $65,000.

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 2008. a.Increase b.Decrease c.No effect -State income taxes paid in 2008.

All dividends received by individual shareholders are subject to either a 15% or a 0% tax rate.

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to determine current E & P for 2008. a.Increase b.Decrease c.No effect -Gain realized (but not recognized)on a like-kind exchange.

On January 2,2008,Green Corporation purchased equipment with an ADS recovery period of 10 years and a MACRS useful life of 7 years.The cost of the equipment was $150,000.Section 179 was not elected.MACRS depreciation properly claimed on the asset,including depreciation in the year of sale,totaled $39,802.50.The assets were sold on July 1,2009,for $145,000.To arrive at current E & P in 2009,how should taxable income be adjusted for the sale?

Any loss in current E & P always is treated as occurring ratably during the year.

Jose receives a nontaxable distribution of stock rights during the year from Gold Corporation on January 30.Each right entitles the holder to purchase one share of stock for $50.One right is issued for every share of stock owned.Jose owns 100 shares of stock purchased two years ago for $5,000.At the date of distribution,the rights are worth $1,000 (100 rights at $10 per right) and Jose's stock in Gold is worth $6,000 (or $60 per share) .On December 1,Jose sells all stock rights for $13 per right.How much gain does Jose recognize on the sale?

If a distribution of stock rights is taxable and their fair market value is less than 15 percent of the value of the old stock,then either a zero basis or a portion of the old stock basis may be assigned to the rights,at the shareholder's option.

When computing current E & P,taxable income is not adjusted for the deferred gain in a § 1033 involuntary conversion.

A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation's E & P and any excess over the basis in the stock investment.

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?

A corporation that distributes a property dividend must reduce its E & P by the fair market value of the property less any liability on the property.

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 2008. a.Increase b.Decrease c.No effect -Gain on installment sale in 2008 deferred until 2009.