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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 1

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Pebble 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 of $340,000 at the beginning of the year. This year, however, Pebble earned a significant profit; taxable income was $240,000. Consequently, Pebble 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. ∙ This year's taxable income included a net operating loss carryover of $50,000. ∙ The corporation's Federal income tax liability is $50,400 for the year. ∙ Pebble paid nondeductible fines and kickbacks of $10,000. The company also paid nondeductible life insurance premiums of $22,000. ∙ The cash surrender value of the corporate-owned life insurance policies increased by $11,000 during the year. ∙ The company sold a piece of equipment during the year and reported a § 1231 gain of $105,000 and recapture income under § 1245 of $35,000. There were no other § 1231 transactions during the year, but the corporation did have a capital loss carryforward of $30,000. ∙ MACRS depreciation exceeds E & P depreciation by $14,000. In addition, an election under § 179 was made this year for $18,000 of assets. a. Compute Pebble's E & P for the year. b. What are the tax consequences of the two distributions made during the year to Martha (her stock basis is $64,000)?

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Question 2

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Tangelo Corporation has an August 31 year-end. Tangelo had $50,000 in accumulated E & P at the beginning of its 2020 fiscal year (September 1, 2019) and during the year, it incurred a $75,000 operating loss. It also distributed $65,000 to its sole shareholder, Cass, on November 30, 2019. If Cass is a calendar year taxpayer, how should she treat the distribution when she files her 2019 income tax return (assuming the return is filed by April 15, 2020) ?

A) $65,000 of dividend income.
B) $60,000 of dividend income and $5,000 recovery of capital.
C) $50,000 of dividend income and $15,000 recovery of capital.
D) The distribution has no effect on Cass in the current year.
E) None of these.

F) B) and E)
G) None of the above

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Question 3

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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:

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, and Tom's basis is $120,000. What is the effect of the distribution by Tulip Corporation on Anne and Tom?

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

Which of the following statements is incorrect with respect to determining current E & P?

Do noncorporate and corporate shareholders typically have the same preference for the tax treatment of a stock redemption? Explain.

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.

At the beginning of the current year, both Paul and John 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?

Steve has a capital loss carryover of $30,000 in the current year. 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 32% tax bracket. What is his income tax liability with respect to the corporate distribution if: a. The redemption qualifies for sale or exchange treatment, and Steve has no other transactions in the current year involving capital assets? b. The redemption does not qualify for sale or exchange treatment, and Steve has no other transactions in the current year involving capital assets.?

A redemption will qualify as a not essentially equivalent redemption only if the shareholder's interest in the redeeming corporation has been meaningfully reduced.

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

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 2019. -Gain realized but not recognized in a like-kind exchange transaction in 2019.

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

Distributions by a corporation to its shareholders are presumed to be a dividend unless the parties can prove otherwise.

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

Penguin Corporation purchased bonds (basis of $190,000) of its 100% owned subsidiary, Finch Corporation, at a discount. Pursuant to a § 332 liquidation and in satisfaction of the indebtedness, Finch distributes land worth $200,000 (basis of $160,000) to Penguin. Which of the following statements is correct with respect to the distribution of land?

If a stock dividend is taxable, the shareholder's basis in the newly received shares is equal to the fair market value of the shares received in the distribution.

Certain dividends from foreign corporations can be qualified dividends for purposes of the preferential rate available to individuals.

A corporation that distributes a property dividend must reduce its E & P by the adjusted basis of the property less any liability on the property.