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Exam 5: Corporations: Earnings Profits and Dividend Distributions

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Question 51

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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?

A) Increase by $1,000 in 2012.
B) Increase by $1,000 in 2013.
C) Decrease by $1,000 in 2012.
D) Decrease by $1,000 in 2013.
E) None of the above.

F) A) and E)
G) A) and C)

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Question 52

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

A) True
B) False

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Question 53

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On January 2,2012,Orange Corporation purchased equipment for $300,000 with an ADS recovery period of 10 years and a MACRS useful life of 7 years.Section 179 was not elected.MACRS depreciation properly claimed on the asset,including depreciation in the year of sale,totaled $79,605.The equipment was sold on July 1,2013,for $290,000.As a result of the sale,the adjustment to taxable income needed to arrive at current E & P is:

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

If stock rights are taxable,the recipient has income to the extent of the fair market value of the rights.

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

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?

How does the payment of a property dividend affect E & P?

Ten years ago,Carrie purchased 2,000 shares in Osprey Corporation for $20,000.In the current year,Carrie receives a nontaxable stock dividend of 20 shares of Osprey preferred.Values at the time of the dividend are: $8,000 for the preferred stock and $72,000 for the common.Based on this information,Carrie's basis in the stock is:

Tern Corporation,a cash basis taxpayer,has taxable income of $500,000 for the current year.Tern elected $100,000 of § 179 expense.It also had a related party loss of $20,000 and a realized (not recognized) gain from an involuntary conversion of $75,000.It paid Federal income tax of $150,000 and paid a nondeductible fine of $10,000.Tern's current E & P is:

Swan Corporation makes a property distribution to its sole shareholder,Matthew.The property distributed is a cottage (fair market value of $135,000;basis of $110,000) that is subject to a $175,000 mortgage that Matthew assumes.Before considering the consequences of the distribution,Swan's current E & P is $25,000 and its accumulated E & P is 100,000.Swan makes no other distributions during the current year.What is Swan's taxable gain on the distribution of the cottage?

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.

When computing current E & P,taxable income is not adjusted for the deferred gain in a § 1031 like-kind exchange.

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.

The dividends received deduction is added back to taxable income to determine E & P.

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:

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.

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