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Exam 5: Corporations: Earnings Profits and Dividend Distributions

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Question 31

Multiple Choice

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Which of the following statements is incorrect with respect to determining current E & P?

A) All tax-exempt income should be added back to taxable income.
B) Dividends received deductions should be added back to taxable income.
C) Charitable contributions in excess of the 10% of taxable income limit should be subtracted from taxable income.
D) Federal income tax refunds should be added back to taxable income.
E) None of the above statements are incorrect.

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

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Question 32

Multiple Choice

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During the current year, Goose Corporation sold equipment for $500,000 (adjusted basis of $260,000) . The equipment was purchased a few years ago for $560,000 and $300,000 in MACRS deductions have been claimed. ADS depreciation would have been $200,000. As a result of the sale, the adjustment to taxable income needed to determine current E & P is:

A) No adjustment is required.
B) Subtract $100,000.
C) Add $100,000.
D) Add $80,000.
E) None of the above.

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

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Question 33

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

As of January 1, Warbler Corporation has a deficit in accumulated E & P of $150,000. For the year, current E & P (accrued ratably) is $260,000 (prior to any distributions) . On July 1, Warbler Corporation distributes $295,000 to its sole shareholder. The amount of the distribution that is a dividend is:

The rules used to determine the taxability of stock dividends also apply to distributions of stock rights.

Ashley, the sole shareholder of Hawk Corporation, has a stock basis of $200,000 at the beginning of the year. On July 1, she sells all of her stock to Matt for $1 million. On January 1, Hawk has accumulated E & P of $90,000 and during the year, current E & P of $160,000. Hawk makes the following cash distributions: $270,000 to Ashley on March 31 and $90,000 to Matt on December 1. How are the distributions taxed to Ashley and Matt? What is Ashley's recognized gain on the sale to Matt?

Timothy owns 100% of Forsythia Corporation's stock. Corporate employees and annual salaries include Timothy ($300,000); Richard, Timothy's son ($80,000); Rita, Timothy's daughter ($100,000); and Sandy ($120,000). The operation of Forsythia Corporation is shared about equally between Timothy and Sandy (an unrelated party). Richard and Rita are full-time college students at a university about 150 miles away. Forsythia Corporation has substantial E & P but has not distributed a dividend for the past five years. Discuss problems related to the salary arrangement for Forsythia Corporation.

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?

In the current year, Verdigris Corporation (with E & P of $250,000) made the following property distributions to its shareholders (all corporations) : Verdigris Corporation is not a member of a controlled group. As a result of the distribution:

Orange Corporation has a deficit in accumulated E & P of $600,000 and has current E & P of $450,000. On July 1, Orange distributes $500,000 to its sole shareholder, Morris, who has a basis in his stock of $105,000. As a result of the distribution, Morris has:

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

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

At the beginning of the current year, Doug and Alfred each own 50% of Amaryllis Corporation (a calendar year taxpayer) . In July, Doug sold his stock to Kevin for $140,000. At the beginning of the year, Amaryllis Corporation had accumulated E & P of $240,000 and its current E & P is $280,000 (prior to any distributions) . Amaryllis distributed $300,000 on February 15 ($150,000 to Doug and $150,000 to Alfred) and distributed another $300,000 on November 1 ($150,000 to Kevin and $150,000 to Alfred) . Kevin has dividend income of:

Tungsten Corporation, a calendar year cash basis taxpayer, made estimated tax payments of $800 each quarter in 2011, for a total of $3,200. Tungsten filed its 2011 tax return in 2012 and the return showed a tax liability $4,200. At the time of filing, March 15, 2012, Tungsten paid an additional $1,000 in Federal income taxes. How does the additional payment of $1,000 impact Tungsten's E & P?

Renee, the sole shareholder of Indigo Corporation, sold her stock to Chad on July 1 for $180,000. Renee's stock basis at the beginning of the year was $120,000. Indigo made a $60,000 cash distribution to Renee immediately before the sale, while Chad received a $120,000 cash distribution from Indigo on November 1. As of the beginning of the current year, Indigo had $26,000 in accumulated E & P, while current E & P (before distributions) was $90,000. Which of the following statements is correct?

Puce 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 $340,000. This year, however, Puce earned a significant profit; taxable income was $240,000. Consequently, Puce made two cash distributions to Martha, its sole shareholder: $150,000 on July 1 and $200,000 December 31. The following information might be relevant to determining the tax treatment of the distributions.

Blue Corporation distributes property to its sole shareholder, Zeke. The property has a fair market value of $450,000, an adjusted basis of $305,000, and is subject to a liability of $250,000. Current E & P is $550,000. With respect to the distribution, Blue has a gain of:

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?

Which of the following is not an economic distortion created by the double tax on dividends?

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.