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Exam 5: Corporations: Earnings Profits and Dividend Distributions

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Question 41

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Kite Corporation, a calendar year taxpayer, has taxable income of $360,000 for 2016. Among its transactions for the year are the following: Disregarding any provision for Federal income taxes, determine Kite Corporation's current E & P for 2016.

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​ ​ The realized ga...

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Question 42

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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 2015.​ -Excess capital loss in year incurred.

A) Increase
B) Decrease
C) No effect

D) B) and C)
E) All of the above

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Question 43

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On January 1, Eagle Corporation (a calendar year taxpayer) has accumulated E & P of $300,000. During the year, Eagle incurs a net loss of $420,000 from operations that accrues ratably. On June 30, Eagle distributes $180,000 to Libby, its sole shareholder, who has a basis in her stock of $112,500. How much of the $180,000 is a dividend to Libby?

The terms "earnings and profits" and "retained earnings" are identical in meaning.

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.

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

Under certain circumstances, a distribution can generate (or add to) a deficit in E & P.

On January 2, 2015, 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, 2016, for $290,000. As a result of the sale, the adjustment to taxable income needed to arrive at current E & P is:

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 2015 -Gain on installment sale in 2015 deferred until 2016.

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?

As of January 1, Cassowary Corporation has a deficit in accumulated E & P of $100,000. For the tax year, current E & P (accrued ratably) is $240,000 (prior to any distributions) . On July 1, Cassowary Corporation distributes $275,000 to its sole shareholder. The amount of the distribution that is a dividend is:

Briefly discuss the rules related to distributions of non-cash property.

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 2015.​ -Dividends received deduction.

In the current year, Warbler Corporation (E & P of $250,000) made the following property distributions to its shareholders (all corporations) : ​ Warbler Corporation is not a member of a controlled group. As a result of the distribution:

If there is sufficient E & P, a distribution of nonconvertible preferred stock to common shareholders is taxable.

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?

Nondeductible meal and entertainment expenses must be subtracted from taxable income to determine current E & P.

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 2015.​ -State income tax paid in the current year.

Falcon Corporation ended its first year of operations with taxable income of $250,000. At the time of Falcon's formation, it incurred $50,000 of organizational expenses. In calculating its taxable income for the year, Falcon claimed an $8,000 deduction for the organizational expenses. What is Falcon's current E & P?

Provide a brief outline on computing current E & P.