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Exam 13: Earnings Profits and Distributions

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Question 21

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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?

A) $0
B) $380,000
C) $480,000
D) $580,000
E) None of the above

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

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Question 22

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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 2017. ​ -Proceeds of life insurance received upon the death of a key employee (policy had no cash surrender value) .

A) Increase
B) Decrease
C) No effect

D) A) and B)
E) None of the above

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Question 23

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Christian, the president and sole shareholder of Venture Corporation, is paid an annual salary of $150,000.Christian would like to draw additional funds from the corporation but is concerned that increased salary might cause the IRS to contend his salary is unreasonable.Further, Christian does not want the corporation to pay any dividends.He would like to contribute $40,000 to his alma mater to establish scholarships for needy students.If Christian makes a pledge to the university to provide $40,000 for scholarships, would there be a problem if Venture Corporation paid the pledge on his behalf? Explain.

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 2017. ​ -Excess capital loss in year incurred.

No E & P adjustment is required for regular tax gains under the installment method.

Brett owns stock in Oriole Corporation (basis of $100,000) as an investment.Oriole distributes property (fair market value of $375,000; basis of $187,500) to him during the year.Oriole has current E & P of $25,000 (which includes the E & P gain on the property distribution) , accumulated E & P of $100,000, and makes no other distributions during the year.What is Brett's capital gain on the distribution?

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?

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.

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 2017. ​ -Charitable contribution carryforward deducted in the current year.

Matching 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 2017. -Interest received from municipal bonds in 2017.

At the beginning of the current year, Paul and John each own 50% of Apple Corporation.In July, Paul sold his stock to Sarah for $110,000.At the beginning of the year, Apple Corporation had accumulated E & P of $200,000 and its current E & P is $250,000 (prior to any distributions).Apple distributed $260,000 on March 1 ($130,000 to Paul and $130,000 to John) and distributed another $260,000 on October 1 ($130,000 to Sarah and $130,000 to John).What are the tax implications of the $130,000 distribution to Sarah?

Robin Corporation distributes furniture (basis of $40,000; fair market value of $50,000) as a property dividend to its shareholders.The furniture is subject to a liability of $55,000.Robin Corporation recognizes gain of:

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 2017. ​ -Gain realized (but not recognized) on a like-kind exchange.

To determine current E & P, taxable income must be increased for any domestic production activities deduction.

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

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

When current E & P is positive and accumulated E & P has a deficit balance, the two accounts are netted for dividend determination purposes.

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 2017. ​ -Intangible drilling costs deducted currently.

During the current year, Hawk Corporation sold equipment for $600,000 (adjusted basis of $360,000) .The equipment was purchased a few years ago for $760,000 and $400,000 in MACRS deductions have been claimed.ADS depreciation would have been $300,000.As a result of the sale, the adjustment to taxable income needed to determine current E & P is:

Aaron and Michele, equal shareholders in Cavalier Corporation, receive $25,000 each in distributions on December 31 of the current year.During the current year, Cavalier sold an appreciated asset for $60,000 (basis of $15,000) .Payment for the sale of the asset will be made as follows: 50% next year and 50% in the following year, with interest payable at a rate of 6 percent.Before considering the effect of the asset sale, Cavalier's current year E & P is $40,000 and it has no accumulated E & P.How much of Aaron's distribution will be taxed as a dividend?