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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 41

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Purple Corporation has accumulated E & P of $100,000 on January 1,2015.In 2015,Purple has current E & P of $130,000 (before any distribution) .On December 31,2015,the corporation distributes $250,000 to its sole shareholder,Cindy (an individual) .Purple Corporation's E & P as of January 1,2016 is:

A) $0.
B) ($20,000) .
C) $100,000.
D) $130,000.
E) None of the above.

F) A) and B)
G) A) and C)

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Question 42

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adjusted to arrive at current E & P for 2015. a.Increase b.Decrease c.No effect -A decrease in the LIFO recapture amount during the year.

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Question 43

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

Tangelo Corporation has an August 31 year-end.Tangelo had $50,000 in accumulated E & P at the beginning of its 2016 fiscal year (September 1,2015) and during the year,it incurred a $75,000 operating loss.It also distributed $65,000 to its sole shareholder,Cass,on November 30,2015.If Cass is a calendar year taxpayer,how should she treat the distribution when she files her 2015 income tax return (assuming the return is filed by April 15,2016) ?

Six years ago,Ronald and his mom each owned 50% of the stock of Bronze Corporation.At such time,Bronze redeemed all of Ronald's stock.For the redemption year,Ronald filed the agreement required of the family attribution waiver and reported the transaction as a complete termination redemption (i.e. ,sale or exchange).In the current year,the mom passed away and willed her entire stock interest in Bronze to Ronald.The inheritance of Bronze stock by Ronald is a prohibited interest for purposes of the family attribution waiver.

Distributions that are not dividends are a return of capital and decrease the shareholder's basis.

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.

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:

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?

When is a redemption to pay death taxes under § 303 most advantageous?

In general,if a shareholder's ownership interest is not diminished as a result of a stock redemption,the Code will treat the transaction as a sale or exchange.

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

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:

On January 1,Tulip Corporation (a calendar year taxpayer) has accumulated E & P of $300,000.Its current E & P for the year is $90,000 (before considering dividend distributions).During the year,Tulip distributes $600,000 ($300,000 each) to its equal shareholders,Anne and Tom.Anne has a basis in her stock of $65,000,while Tom's basis is $120,000.What is the effect of the distribution by Tulip Corporation on Anne and Tom?

Jen,the sole shareholder of Mahogany Corporation,sold her stock to Jason on July 1 for $90,000.Jen's stock basis at the beginning of the year was $60,000.Mahogany made a $30,000 cash distribution to Jen immediately before the sale,while Jason received a $60,000 cash distribution from Mahogany on November 1.As of the beginning of the current year,Mahogany had $16,000 in accumulated E & P,while current E & P (before distributions) is $30,000.What are the tax consequences of these transactions to Jen and Jason?

In the current year,Warbler Corporation (E & P of $250,000) made the following property distributions to its shareholders (all corporations) : Adjusted Basis Fair Market Value Pink Corporation stock (held for investment) $150,000 $120,000 Non-LIFO inventory 80,000 110,000 ​ Warbler Corporation is not a member of a controlled group.As a result of the distribution:

A shareholder's basis in property acquired in a stock redemption is the property's fair market value as of the date of redemption.

In the current year,Quail Corporation distributed installment notes payable in redemption of some of its shares.Quail incurred the following expenditures in connection with the redemption: accounting fees of $7,000 and legal fees of $8,000.In addition,Quail paid $10,000 of interest expense on the installment notes payable.The distribution was a qualifying stock redemption.How much of the $25,000 is deductible in the current year?

Seven years ago,Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 2,000 shares of Blue Corporation in a transaction that qualified under § 351.The assets had a tax basis to her of $400,000 and a fair market value of $700,000 on the date of the transfer.In the current year,Blue Corporation (E & P of $1 million) redeems 600 shares from Eleanor for $260,000 in a transaction that does not qualify for sale or exchange treatment.With respect to the redemption,Eleanor will have a:

Betty's adjusted gross estate is $9 million.The death taxes and funeral and administration expenses of her estate total $1.2 million.Included in Betty's gross estate is stock in Heron Corporation,valued at $3.3 million as of the date of her death.Betty had acquired the stock six years ago at a cost of $810,000.If Heron Corporation redeems $1.2 million of Heron stock from the estate,the transaction will qualify under § 303 as a redemption to pay death taxes and receive sale or exchange treatment.