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Exam 10: Corporations: Earnings Profits and Distributions

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Question 21

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

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Question 22

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On January 2,2013,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 1,2014,for $290,000.As a result of the sale,the adjustment to taxable income needed to arrive at current E & P is:

A) No adjustment is required.
B) Decrease $49,605.
C) Increase $49,605.
D) Decrease $79,605.
E) None of the above.

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Question 23

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Steve has a capital loss carryover in the current year of $30,000.He owns 3,000 shares of stock in Carmine Corporation,which he purchased six years ago for $20 per share.In the current year,Carmine Corporation (E & P of $750,000)redeems all of his shares for $140,000.Steve is in the 33% tax bracket.What is his income tax liability with respect to the corporate distribution if:

Purple Corporation has accumulated E & P of $100,000 on January 1,2013.In 2013,Purple has current E & P of $130,000 (before any distribution) .On December 31,2013,the corporation distributes $250,000 to its sole shareholder,Cindy (an individual) .Purple Corporation's E & P as of January 1,2014 is:

Purple Corporation makes a property distribution to its sole shareholder,Paul.The property distributed is a house (fair market value of $189,000; basis of $154,000) that is subject to a $245,000 mortgage that Paul assumes.Before considering the consequences of the distribution,Purple's current E & P is $35,000 and its accumulated E & P is $140,000.Purple makes no other distributions during the current year.What is Purple's taxable gain on the distribution of the house?

Regardless of any deficit in current E & P,distributions during the year are taxed as dividends to the extent of accumulated E & P.

If there is sufficient E & P,a distribution of nonconvertible preferred stock to common shareholders is taxable.

Thrush,Inc.,is a calendar year,accrual basis corporation with Henry as its sole shareholder (basis in his stock is $90,000).On January 1 of the current year,Thrush Corporation has accumulated E & P of $200,000.Before considering the effect of the distribution described below,the corporation's current E & P is $50,000.On November 1,Thrush distributes an office building to Henry.The office building has an adjusted basis of $80,000 (fair market value of $100,000)and is subject to a mortgage of $110,000.Assume that the building has been depreciated using the ADS method for both income tax and E & P purposes.What are the tax consequences of the distribution to Thrush and to Henry? (In your answer,be sure to describe the effects on taxable income for both Thrush and Henry,the impact of the distribution on Thrush's E & P,and Henry's basis in the building.)

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.

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:

Blue Corporation has a deficit in accumulated E & P of $300,000 and has current E & P of $225,000.On July 1,Blue distributes $250,000 to its sole shareholder,Sam,who has a basis in his stock of $52,500.As a result of the distribution,Sam has:

Puce Corporation,an accrual basis taxpayer,has struggled to survive since its formation,six years ago.As a result,it has a deficit in accumulated E & P at the beginning of the year of $340,000.This year,however,Puce earned a significant profit; taxable income was $240,000.Consequently,Puce made two cash distributions to Martha,its sole shareholder: $150,000 on July 1 and $200,000 December 31.The following information might be relevant to determining the tax treatment of the distributions.

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:

How does the definition of accumulated E & P differ from the definition of current E & P?

The tax treatment of corporate distributions at the shareholder level does not depend on:

Constructive dividends do not need to satisfy the legal requirements for a dividend as set forth by applicable state law.

Renee,the sole shareholder of Indigo Corporation,sold her stock to Chad on July 1 for $180,000.Renee's stock basis at the beginning of the year was $120,000.Indigo made a $60,000 cash distribution to Renee immediately before the sale,while Chad received a $120,000 cash distribution from Indigo on November 1.As of the beginning of the current year,Indigo had $26,000 in accumulated E & P,while current E & P (before distributions) was $90,000.Which of the following statements is correct?

Stephanie is the sole shareholder and president of Hawk Corporation.She feels that she can justify at least a $220,000 bonus this year because of her performance.However,rather than a bonus in the form of a salary,she plans to have Hawk pay her a $220,000 dividend.Because Stephanie's marginal tax rate is 35%,she prefers to receive a dividend taxed at 15%.Her accountant,however,suggests a $310,000 bonus in lieu of the $220,000 dividend since Hawk Corporation is in the 34% tax bracket.Should Stephanie take the $220,000 dividend or the $310,000 bonus? Support your answer by computing the after-tax cost of the two alternatives to Hawk and to Stephanie.

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:

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?