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Exam 5: Corporations: Earnings Profits and Dividend Distributions

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Question 41

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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. )

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The corporation recognizes gain of $30,0...

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Question 42

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In certain circumstances,the amount of dividend income recognized by a shareholder from a property distribution is not reduced by the amount of liability assumed by a shareholder.

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B) False

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Question 43

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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.

Pink Corporation declares a nontaxable dividend payable in rights to subscribe to common stock.Each right entitles the holder to purchase one share of stock for $25.One right is issued for every two shares of stock owned.Jack owns 100 shares of stock in Pink,which he purchased three years ago for $3,000.At the time of the distribution,the value of the stock is $45 per share and the value of the rights is $2 per share.Jack receives 50 rights.He exercises 25 rights and sells the remaining 25 rights three months later for $2.50 per right.

Duck Corporation is a calendar year taxpayer formed in 2006.Duck's E & P for each of the past 5 years is listed below. Duck Corporation made the following distributions in the previous 5 years. Duck's accumulated E & P as of January 1,2012 is:

Maria and Christopher each own 50% of Cockatoo Corporation,a calendar year taxpayer.Distributions from Cockatoo are: $750,000 to Maria on April 1 and $250,000 to Christopher on May 1.Cockatoo's current E & P is $300,000 and its accumulated E & P is $600,000.How much of the accumulated E & P is allocated to Christopher's distribution?

A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation's E & P.

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?

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.

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?

Briefly describe the reason a corporation might distribute a property dividend to a shareholder in lieu of a cash distribution.Describe the tax effects of the property distribution on the shareholder and on the corporation.

Finch Corporation (E & P of $400,000)distributed machinery ($10,000 adjusted basis,$150,000 fair market value)to its sole shareholder,Kathleen.The property is subject to a $50,000 mortgage,which Kathleen assumed.How much dividend income does Kathleen recognize as a result of the distribution and what is her basis in the machinery?

To determine E & P,some (but not all)previously excluded income items are added back to taxable income.

Platinum Corporation,a calendar year taxpayer,has taxable income of $500,000.Among its transactions for the year are the following: Disregarding any provision for Federal income taxes,Platinum Corporation's current E & P is:

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

Dividends paid to shareholders who hold both long and short positions do not qualify for the reduced tax rate available to individuals in certain years.

In June of the current year,Marigold Corporation declares a $4 dividend out of E & P on each share of common stock to shareholders of record on August 1.Ellen and Tim each purchase 100 shares of Marigold stock on July 1.On July 15,Ellen also purchases a short position in Marigold.Tim sells 50 of his shares on August 10 and continues to hold the remaining 50 shares through the end of the year.Ellen closes her short position in Marigold on October 15.With respect to the dividends,which of the following is correct?

Samantha owns stock in Pigeon Corporation (basis of $80,000) as an investment.Pigeon distributes property (fair market value of $300,000;basis of $150,000) to her during the year.Pigeon has current E & P of $20,000 and accumulated E & P of $80,000 and makes no other distributions during the year.What is Samantha's capital gain on the distribution?

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?

Certain dividends from foreign corporations can be qualified dividends for purposes of the 15% rate available to individuals.