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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 91

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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?

A) $0.
B) $300,000.
C) $500,000.
D) $600,000.
E) None of the above.

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

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Question 92

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At a time when Blackbird Corporation had E & P of $700,000 and 1,000 shares of stock outstanding, the corporation distributed $300,000 to redeem 400 shares of its stock. The transaction qualified as a disproportionate redemption for the shareholder. Blackbird's E & P is reduced by $300,000 as a result of the distribution.

A) True
B) False

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Question 93

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In a property distribution, the amount of dividend income recognized by a shareholder is always reduced by the amount of liability assumed by a shareholder.

Silver Corporation, a calendar year taxpayer, has taxable income of $550,000. Among its transactions for the year are the following: Collection of proceeds from insurance policy on life of corporate Officer (in excess of cash surrender value) $82,500 Realized gain (not recognized) on an involuntary conversion 11,000 Nondeductible fines and penalties 44,000 Disregarding any provision for Federal income taxes, Silver Corporation's current E & P is:

Cedar Corporation is a calendar year taxpayer formed in 2010. Cedar's E & P for each of the past 5 years is listed below. $\begin{array} { l l } 2014 &\$28,000 \\2013 & \$ 40,000 \\2012 & \$ 39,000 \\2011 & \$ 68,000 \\2010 & \$16,000\end{array}$ Cedar Corporation made the following distributions in the previous 5 years. 2013 Land (basis of $70,000, fair market value of $80,000) 2010 $20,000 cash Cedar's accumulated E & P as of January 1, 2015 is:

Briefly define the term "earnings and profits."

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to determine current E & P. -Gain realized (but not recognized) on a like-kind exchange.

In the current year, Carnation Corporation has a § 179 expense of $60,000. As a result, in the current year, taxable income must be increased by $48,000 to determine current E & P.

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to determine current E & P. -Penalties paid to state government for failure to comply with state law.

Rose Corporation (a calendar year taxpayer) has taxable income of $300,000, and its financial records reflect the following for the year. Federal income taxes paid $110,000 Net operating loss carryforward deducted currently 70,000 Gain recognized this year on an installment sale from a prior year 44,000 Depreciation deducted on tax return (ADS depreciation would have been $10,000) 40,000 Interest income on Iowa state bonds 8,000 Rose Corporation’s current E & P is:

Maria and Christopher each own 50% of Cockatoo Corporation, a calendar year taxpayer. Distributions from Cockatoo are: $750,000 to Maria on April 1 and $250,000 to Christopher on May 1. Cockatoo's current E & P is $300,000 and its accumulated E & P is $600,000. How much of the accumulated E & P is allocated to Christopher's distribution?

The dividends received deduction has no impact on E & P.

Sam's gross estate includes stock in Tern Corporation and Wren Corporation, valued at $1.4 million and $980,000, respectively. At the time of Sam's death, the stock represented 22% of Tern's outstanding stock and 27% of Wren's outstanding stock. Sam's adjusted gross estate equals $6,500,000. Death taxes and funeral and administration expenses for Sam's estate total $980,000. Sam had a basis of $350,000 in the Tern stock and $190,000 in the Wren stock at the time of his death. None of the beneficiaries of Sam's estate own (directly or indirectly) any stock in Tern Corporation, but some of the beneficiaries own stock of Wren Corporation. Consider the following independent questions. a. What are the tax consequences to the estate if all of its Wren stock is redeemed by Wren Corporation for $980,000? b. What are the tax consequences to the estate if all of its Tern stock is redeemed by Tern Corporation for $1.4 million?

Robin Corporation, a calendar year taxpayer, has a deficit in current E & P of $200,000 and a $580,000 positive balance in accumulated E & P. If Robin determines that a $700,000 distribution to its shareholders is appropriate at some point during the year, what is the maximum amount of the distribution that could potentially be treated as a dividend?

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?

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?

Copper Corporation (E & P of $1.2 million) distributes land (basis of $410,000, fair market value of $650,000) to Lauren, a shareholder, to carry out a qualifying stock redemption. Lauren had a basis of $90,000 in the shares redeemed. Which of the following is an incorrect statement regarding the redemption?