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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 91

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Canary Corporation has 5,000 shares of stock outstanding. It redeems in a qualifying stock redemption 1,200 shares for $475,000 at a time when it has paid-in capital of $300,000 and E & P of $1.5 million. What would be the charge to Canary's E & P as a result of the redemption?

A) $72,000
B) $300,000
C) $432,000
D) $475,000
E) None of the above

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

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Question 92

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

A) True
B) False

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Question 93

Multiple Choice

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Starling Corporation has accumulated E & P of $60,000 on January 1, 2018. In 2018, Starling Corporation had an operating loss of $80,000. It distributed cash of $40,000 to Zoe, its sole shareholder, on December 31, 2018. Starling Corporation's balance in its E & P account as of January 1, 2019, is:

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 2018. a. Increase b. Decrease c. No effect -Intangible drilling costs deducted currently.

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?

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 2018. a. Increase b. Decrease c. No effect -Additional first-year (bonus) depreciation deduction claimed in 2018.

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?

During the year, Blue Corporation distributes land to its sole shareholder. If the fair market value of the land is less than its adjusted basis, Blue will not be able to recognize a loss on the distribution.

On January 1, Eagle Corporation (a calendar year taxpayer) has accumulated E & P of $300,000. During the year, Eagle incurs a net loss of $420,000 from operations that accrues ratably. On June 30, Eagle distributes $180,000 to Libby, its sole shareholder, who has a basis in her stock of $112,500. How much of the $180,000 is a dividend to Libby?

Rust Corporation distributes property to its sole shareholder, Andre. The property has a fair market value of $350,000, an adjusted basis of $205,000, and is subject to a liability of $220,000. Current E & P is $500,000. With respect to the distribution, which of the following statements is correct?

A redemption will qualify as a not essentially equivalent redemption only if the shareholder's interest in the redeeming corporation has been meaningfully reduced.

If a stock dividend is taxable, the shareholder's basis in the newly received shares is equal to the fair market value of the shares received in the distribution.

Scarlet Corporation is an accrual basis, calendar year corporation. Scarlet distributes inventory (basis of $20,000? fair market value of $40,000) to Frank, its shareholder. Assuming that Scarlet has $500,000 of current E & P, what is the impact of the distribution on Scarlet Corporation and on Frank?

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 2018. a. Increase b. Decrease c. No effect -Proceeds of life insurance received upon the death of a key employee (policy had no cash surrender value).

Tern Corporation, a cash basis taxpayer, has taxable income of $500,000 for the current year. Tern elected $25,000 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:

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 2018. a. Increase b. Decrease c. No effect -State income tax paid in the current year.

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

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 2018. a. Increase b. Decrease c. No effect -Charitable contribution carryforward deducted in the current year.

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 realized gain from an involuntary conversion under § 1033 that is not recognized for income tax purposes has no effect on E & P.