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Exam 13: Corporations: Earnings and Profits and Distributions

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Question 21

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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?

A) $0
B) $300,000
C) $500,000
D) $600,000
E) None of the above

F) C) and D)
G) A) and B)

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Question 22

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

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Accumulated E & P is the total of all pr...

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Question 23

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An increase in the LIFO recapture amount must be added to taxable income to determine E & P.

Blue Corporation has a deficit in accumulated E & P of $300,000 and has current E & P of $225,000.On July 1, Blue distributes $250,000 to its sole shareholder, Sam, who has a basis in his stock of $52,500.As a result of the distribution, Sam has:

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

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?

Stacey and Eva each own one-half of the stock in Parakeet Corporation, a calendar year taxpayer.Cash distributions from Parakeet are: $350,000 to Stacey on April 1 and $150,000 to Eva on May 1.If Parakeet's current E & P is $60,000, how much is allocated to Eva's distribution?

All cash distributions received from a corporation with a positive balance in accumulated E & P at the beginning of the year will be taxed as dividend income.

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

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.

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.

Tern Corporation, a cash basis taxpayer, has taxable income of $500,000 for the current year.Tern elected $25,000 of § 179 expense.It also had a related party loss of $20,000 and a realized not recognized) gain from an involuntary conversion of $75,000.It paid Federal income tax of $150,000 and paid a nondeductible fine of $10,000.Tern's current E & P is:

Briefly define the term "earnings and profits."

Sylvia owns 25% of Cormorant Corporation.Cormorant sells diamonds to retail jewelry businesses.While Cormorant has a deficit in accumulated E & P of $56,000 at the beginning of the year, its current E & P is $500,000.Since the company had a successful year, Cormorant pays a $36,000 distribution to each of the company's four shareholders on December 15.Three shareholders receive cash, but Cormorant distributes a diamond adjusted basis of $40,000 and a fair market value of $36,000) to Sylvia in lieu of cash.Determine the effect of distributing the diamond on Cormorant's and on Sylvia's taxable income.What is Sylvia's basis in the diamond? Was the distribution good tax planning on the part of Cormorant? Why or why not?

Ashley, the sole shareholder of Hawk Corporation, has a stock basis of $200,000 at the beginning of the year.On July 1, she sells all of her stock to Matt for $1 million.On January 1, Hawk has accumulated E & P of $90,000 and during the year, current E & P of $160,000.Hawk makes the following cash distributions: $270,000 to Ashley on March 31 and $90,000 to Matt on December 1.How are the distributions taxed to Ashley and Matt? What is Ashley's recognized gain on the sale to Matt?

How does the payment of a property dividend affect E & P?

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:

Premiums paid on key employee life insurance policy assume no increase in cash surrender value of policy) in 2018.

Ten years ago, Carrie purchased 2,000 shares of common stock in Osprey Corporation for $20,000.In the current year, Carrie receives a nontaxable stock dividend of 20 shares of Osprey preferred.Values at the time of the dividend are: $8,000 for the preferred stock and $72,000 for the common.Based on this information, Carrie's basis in the stock is:

Tungsten Corporation, a calendar year cash basis taxpayer, made estimated tax payments of $800 each quarter in 2018, for a total of $3,200.Tungsten filed its 2018 tax return in 2019 and the return showed a tax liability $4,200.At the time of filing, March 15, 2019, Tungsten paid an additional $1,000 in Federal income taxes.How does the additional payment of $1,000 impact Tungsten's E & P?