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Exam 5: Corporations Earnings Profits and Dividend Distributions

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Question 1

Multiple Choice

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Robin Corporation, a calendar year taxpayer, has a deficit in current E & P of $200,000 and a $580,000 positive balance in accumulated E & P. If Robin determines that a $700,000 distribution to its shareholders is appropriate at some point during the year, what is the maximum amount of the distribution that could potentially be treated as a dividend?

A) $0
B) $380,000
C) $480,000
D) $580,000
E) None of the above

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

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Question 2

Multiple Choice

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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. -Section 179 expense in second year following election.

A) Increase
B) Decrease
C) No effect

D) B) and C)
E) A) and C)

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Question 3

Multiple Choice

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Rose Corporation (a calendar year taxpayer) has taxable income of $300,000, and its financial records reflect the following for the year. $\begin{array}{llr} \text { Federal income taxes pad} &\$110,000\\ \text { Net operating loss carry forward deducted currently} &70,000\\ \text { Gain recognized this year on an installment sale from a prior year } &44,000\\ \text {Depreciation deducted on tax return (ADS depreciation would have been \$ 10,000 ) } &40,000\\ \text { Interest income on Iowa state bonds } &8,000\\\end{array}$ ? Rose Corporation's current E & P is:

Dividends taxed as ordinary income are considered investment income for purposes of the investment interest expense limitation.

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

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.

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

A deficit in current E & P is treated as occurring ratably during the year, unless the taxpayer can show otherwise.

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

Corporate distributions are presumed to be paid out of E & P and are treated as dividends unless the parties to the transaction can show otherwise.

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. -Gain realized (but not recognized) on a like-kind exchange.

The rules used to determine the taxability of stock dividends also apply to distributions of stock rights.

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. -State income tax paid in the current year.

A realized gain from an involuntary conversion under § 1033 that is not recognized for income tax purposes has no effect on E & P.

Which one of the following statements about property distributions is false?

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. -Domestic production activities deduction claimed in 2016.

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

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. -Meal and entertainment expenses not deducted in 2016 because of the 50% limitation.

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

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?