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Exam 13: Corporations: Earnings Profits and Distributions

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Question 61

True/False

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

A) True
B) False

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Question 62

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Constructive dividends have no effect on a distributing corporation's E & P.

A) True
B) False

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Question 63

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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 2016. -Interest received from municipal bonds in 2016.

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

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

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 2016. -Cash dividends distributed to shareholders in 2016.

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

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?

A distribution in excess of E & P is treated as capital gain by shareholders.

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

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?

Scarlet Corporation is an accrual basis, calendar year corporation. Scarlet distributes inventory (basis of $20,000; fair market value of $40,000) to Frank, its shareholder. Assuming that Scarlet has $500,000 of current E & P, what is the impact of the distribution on Scarlet Corporation and on Frank?

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.

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

On January 2, 2016, 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, 2017, for $290,000. As a result of the sale, the adjustment to taxable income needed to arrive at current E & P is:

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.

Kite Corporation, a calendar year taxpayer, has taxable income of $360,000 for 2017. Among its transactions for the year are the following: Disregarding any provision for Federal income taxes, determine Kite Corporation's current E & P for 2017.

Silver Corporation, a calendar year taxpayer, has taxable income of $550,000. Among its transactions for the year are the following: ​ Disregarding any provision for Federal income taxes, Silver Corporation's current E & P is:

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.

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