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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 71

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Nondeductible meal and entertainment expenses must be subtracted from taxable income to determine current E & P.

A) True
B) False

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Question 72

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Dividends taxed as ordinary income are considered investment income for purposes of the investment interest expense limitation.

A) True
B) False

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Question 73

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In determining whether a distribution qualifies as a § 303 redemption to pay death taxes, the stock attribution rules must be applied.

Reginald and Roland (Reginald's son) each own 50% of the stock of Robin Corporation.Reginald's stock interest is entirely redeemed by Robin Corporation.Two years later, Reginald loans Robin Corporation $250,000.The loan to Robin Corporation does not constitute a prohibited interest for purposes of the family attribution waiver.

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

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?

In the current year, Loon Corporation made a distribution in redemption of some of its shares.Loon incurred expenditures in connection with the redemption totaling $35,000 (accounting fees of $9,000, legal fees of $20,000, and brokerage fees of $6,000) .The distribution was a qualifying stock redemption.How much of the $35,000 is deductible in the current year?

Lucinda owns 1,100 shares of Blackbird Corporation stock at a time when Blackbird has 2,000 shares of stock outstanding.The remaining shareholders are unrelated to Lucinda.What is the minimum number of shares Blackbird must redeem from Lucinda so that the transaction will qualify as a disproportionate redemption?

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

Daisy Corporation is the sole shareholder of Ostrich Corporation, which it hopes to sell within the next three years.The Ostrich stock (basis of $25 million) is currently worth $30 million, but Daisy believes that it would be easier to find a buyer if it was worth less.To lower the value of its stock, Ostrich distributes $4 million cash to Daisy (sufficient E & P exists to cover the distribution).At a later date, Daisy sells Ostrich for $26 million.

On January 30, Juan receives a nontaxable distribution of stock rights from Platinum Corporation.Each right entitles the holder to purchase one share of stock for $40.One right is issued for every share of stock owned.Juan owns 100 shares of stock purchased two years ago for $4,000.At the date of distribution, the rights are worth $1,000 (100 rights at $10 per right) and Juan's stock in Platinum is worth $5,000 (or $50 per share) .On December 1, Juan sells all 100 stock rights for $12 per right.How much gain does Juan recognize on the sale?

An increase in the LIFO recapture amount must be added to taxable income to determine E & P.

Thrush, Inc., is a calendar year, accrual basis corporation with Henry as its sole shareholder (basis in his stock is $90,000).On January 1 of the current year, Thrush Corporation has accumulated E & P of $200,000.Before considering the effect of the distribution described below, the corporation's current E & P is $50,000.On November 1, Thrush distributes an office building to Henry.The office building has an adjusted basis of $80,000 (fair market value of $100,000) and is subject to a mortgage of $110,000. Assume that the building has been depreciated using the ADS method for both income tax and E & P purposes.What are the tax consequences of the distribution to Thrush and to Henry? (In your answer, be sure to describe the effects on taxable income for both Thrush and Henry, the impact of the distribution on Thrush's E & P, and Henry's basis in the building.)

Kite Corporation has 1,000 shares of stock outstanding. Kent owns 300 shares, Kent's father owns 200 shares, Kent's daughter owns 100 shares, and Kent's aunt owns 200 shares. Plover Corporation owns the other 200 shares in Kite Corporation. Kent owns 75% of the stock in Plover Corporation. Applying the § 318 stock attribution rules, how many shares does Kent own in Kite Corporation?

Julian, Berta, and Maria own 400 shares, 400 shares, and 200 shares, respectively, in Caramel Corporation (E & P of $750,000) .Berta is Julian's sister, and Maria is Julian's aunt.Caramel Corporation redeems all of Julian's stock for $420,000.Julian paid $200 a share for the stock five years ago.Julian continued to serve on Caramel's board of directors after the redemption.With respect to the redemption:

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.

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?

Vireo Corporation redeemed shares from its sole shareholder pursuant to a written agreement between the parties that clearly identified the transaction as a stock redemption (and not a dividend distribution). Since the agreement is binding under state law, the shareholder will receive sale or exchange treatment with respect to the redemption.

A distribution in excess of E & P is treated as capital gain by shareholders.

Explain the stock attribution rules that apply in the case of stock redemptions.