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Exam 13: Earnings Profits and Distributions

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Question 51

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Glenda is the sole shareholder of Condor Corporation.She sold her stock to Melissa on October 31 for $150,000.Glenda's basis in Condor stock was $50,000 at the start of the year.Condor distributed land to Glenda immediately before the sale.Condor's basis in the land was $20,000 (fair market value of $25,000) .On December 31, Melissa received a $75,000 cash distribution from Condor.During the year, Condor has $20,000 of current E & P and its accumulated E & P balance on January 1 is $10,000.Which of the following statements is true?

A) Glenda recognizes a $110,000 gain on the sale of her stock.
B) Glenda recognizes a $100,000 gain on the sale of her stock.
C) Melissa receives $5,000 of dividend income.
D) Glenda receives $20,000 of dividend income.
E) None of the above.

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

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Question 52

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Use of MACRS cost recovery when computing taxable income does not require an E & P adjustment.

A) True
B) False

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Question 53

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Purple Corporation has accumulated E & P of $100,000 on January 1, 2017.In 2017, Purple has current E & P of $130,000 (before any distribution) .On December 31, 2017, the corporation distributes $250,000 to its sole shareholder, Cindy (an individual) .Purple Corporation's E & P as of January 1, 2018 is:

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

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:

In the current year, Carnation Corporation has a § 179 expense of $20,000.As a result, in the current year, taxable income must be increased by $16,000 to determine current E & P.

In general, how are current and accumulated earnings and profits allocated to corporate distributions?

Tungsten Corporation, a calendar year cash basis taxpayer, made estimated tax payments of $800 each quarter in 2017, for a total of $3,200.Tungsten filed its 2017 tax return in 2018 and the return showed a tax liability $4,200.At the time of filing, March 15, 2018, Tungsten paid an additional $1,000 in Federal income taxes.How does the additional payment of $1,000 impact Tungsten's E & P?

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?

Corporate shareholders generally receive less favorable tax treatment from a qualifying stock redemption than from a dividend distribution.

Briefly describe the rationale for the reduced tax rate on dividends for individual taxpayers.

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?

Brown Corporation, an accrual basis corporation, has taxable income of $150,000 in the current year.Included in its determination of taxable income are the following transactions. ? Brown incurred a $65,000 capital loss from the sale of stock.Because Brown had no capital gains this year, none of the loss is deductible. ? The corporation's Federal income tax liability is $41,750. ? Brown incurred $18,000 in nondeductible meal and entertainment expenses. ? Brown uses the LIFO method when accounting for inventory.This year, the company's LIFO recapture amount increased by $3,000. ? Brown claimed a domestic production activities deduction under § 199 of $1,500. ? What is Brown's current E & P for the year?

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. ​ -A decrease in the LIFO recapture amount during the year.

At the beginning of the current year, Doug and Alfred each own 50% of Amaryllis Corporation (a calendar year taxpayer) .In July, Doug sold his stock to Kevin for $140,000.At the beginning of the year, Amaryllis Corporation had accumulated E & P of $240,000 and its current E & P is $280,000 (prior to any distributions) .Amaryllis distributed $300,000 on February 15 ($150,000 to Doug and $150,000 to Alfred) and distributed another $300,000 on November 1 ($150,000 to Kevin and $150,000 to Alfred) .Kevin has dividend income of:

When computing current E & P, taxable income must be adjusted for the deferred gain in a § 1031 like-kind exchange.

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?

Which of the following statements regarding constructive dividends is not correct?

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?

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?