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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 71

True/False

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Corporate distributions are presumed to be paid out of E & P and are treated as dividends unless the parties to the transaction can show otherwise.

A) True
B) False

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Question 72

Multiple Choice

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Lupe and Rodrigo, father and son, each own 50% of the stock outstanding of Heron Corporation (E & P of $400,000) . During the current year, Heron redeems all of Lupe's shares for $250,000. The transaction cannot qualify as a complete termination redemption if:

A) Three years after the redemption, Lupe receives shares of stock in Heron as a gift from Rodrigo.
B) Lupe received a $250,000 note receivable from Heron in the stock redemption.
C) Lupe loaned Heron Corporation $50,000 two years following the redemption.
D) Rodrigo continued to serve on Heron Corporation's board of directors for five years following the redemption.
E) More than one of the above is correct.

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

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Question 73

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Gold Corporation has accumulated E & P of $2 million as of January 1 of the current year.During the year, it expects to have earnings from operations of $1,680,000 and to distribute $900,000 in cash to shareholders.Gold Corporation also expects to sell an asset for a loss of $2 million.Thus, it anticipates incurring a deficit of $320,000 for the year.What can Gold do to minimize the amount of dividend income to its shareholders?

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

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

Samantha owns stock in Pigeon Corporation (basis of $80,000) as an investment.Pigeon distributes property (fair market value of $300,000; basis of $150,000) to her during the year.Pigeon has current E & P of $20,000 and accumulated E & P of $80,000 and makes no other distributions during the year.What is Samantha's capital gain on the distribution?

Finch Corporation distributes property (basis of $225,000, fair market value of $300,000) to a shareholder in a distribution that is a qualifying stock redemption.The property is subject to a liability of $160,000, which the shareholder assumes.The basis of the property to the shareholder is:

The adjusted gross estate of Keith, decedent, is $6 million.Included in the gross estate is stock in Gold Corporation (E & P of $750,000) , a closely held corporation, valued at $2.4 million as of the date of Keith's death in 2012.Keith had acquired the stock twelve years ago at a cost of $420,000.Death taxes and funeral and administration expenses for Keith's estate are $1.2 million.Gold Corporation redeems one-half of the stock from Keith's estate in a § 303 redemption to pay death taxes using property with a fair market value of $1.2 million (adjusted basis of $950,000) .Which of the following is a correct statement regarding the tax consequences of this redemption?

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

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.

Sylvia owns 25% of Cormorant Corporation.Cormorant sells diamonds to retail jewelry businesses.While Cormorant has a deficit in accumulated E & P of $56,000 at the beginning of the year, its current E & P is $500,000.Since the company had a successful year, Cormorant pays a $36,000 distribution to each of the company's four shareholders on December 15.Three shareholders receive cash, but Cormorant distributes a diamond (adjusted basis of $40,000 and a fair market value of $36,000) to Sylvia in lieu of cash.Determine the effect of distributing the diamond on Cormorant's and on Sylvia's taxable income.What is Sylvia's basis in the diamond? Was the distribution good tax planning on the part of Cormorant? Why or why not?

Goldfinch Corporation distributes stock rights to its shareholders. How is the basis of the stock rights received by Goldfinch's shareholders determined?

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.

Starling Corporation has accumulated E & P of $60,000 on January 1, 2012.In 2012, Starling Corporation had an operating loss of $80,000.It distributed cash of $40,000 to Zoe, its sole shareholder, on December 31, 2012.Starling Corporation's balance in its E & P account as of January 1, 2013, is:

Tungsten Corporation, a calendar year cash basis taxpayer, made estimated tax payments of $800 each quarter in 2012, for a total of $3,200.Tungsten filed its 2012 tax return in 2013 and the return showed a tax liability $4,200.At the time of filing, March 15, 2013, Tungsten paid an additional $1,000 in Federal income taxes.How does the additional payment of $1,000 impact Tungsten's E & P?

Scarlet Corporation (a calendar year taxpayer) has taxable income of $150,000, and its financial records reflect the following for the year. Scarlet Corporation's current E & P is:

The gross estate of John, decedent, includes stock in Crimson Corporation and Jade Corporation valued at $1.3 million and $2 million, respectively. John's adjusted gross estate is $9 million. He owned 23% of the Crimson stock and 31% of the Jade stock. Immediate members of John's family own the remaining shares of both Crimson and Jade. Those individuals are also the sole beneficiaries of John's estate. Death taxes and funeral and administration expenses for John's estate are $1.3 million. John had a basis of $475,000 in the Crimson stock and $510,000 in the Jade stock. Crimson Corporation (E & P of $3 million) distributed land worth $1.3 million (basis of $800,000) to John's estate in redemption of all of the Crimson stock. Which of the following is a correct statement regarding the tax consequences of this redemption?

In certain circumstances, the amount of dividend income recognized by a shareholder from a property distribution is not reduced by the amount of liability assumed by a shareholder.

Navy Corporation has E & P of $240,000.It distributes land with a fair market value of $70,000 (adjusted basis of $25,000) to its sole shareholder, Troy.The land is subject to a liability of $55,000 that Troy assumes.Troy has:

As of January 1, Cassowary Corporation has a deficit in accumulated E & P of $100,000.For the tax year, current E & P (accrued ratably) is $240,000 (prior to any distributions) .On July 1, Cassowary Corporation distributes $275,000 to its sole shareholder.The amount of the distribution that is a dividend is: