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Exam 5: Corporations: Earnings and Profits and Dividend Distributions

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Question 51

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Tungsten Corporation, a calendar year cash basis taxpayer, made estimated tax payments of $800 each quarter in 2019, for a total of $3,200. Tungsten filed its 2019 tax return in 2020 and the return showed a tax liability $4,200. When it filed its tax return in 2020, Tungsten paid an additional $1,000 in Federal income taxes. How does the additional payment of $1,000 impact Tungsten's E & P?

A) Increase by $1,000 in 2019.
B) Increase by $1,000 in 2020.
C) Decrease by $1,000 in 2019.
D) Decrease by $1,000 in 2020.
E) None of these.

F) C) and D)
G) A) and E)

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Question 52

Multiple Choice

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On January 2, 2019, 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, 2020, for $290,000. As a result of the sale, the adjustment to taxable income needed to arrive at current E & P is:

A) No adjustment is required.
B) Decrease $49,605.
C) Increase $49,605.
D) Decrease $79,605.
E) None of these.

F) All of the above
G) C) and D)

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Question 53

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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 October15. With respect to the dividends, which of the following is correct?

A corporate shareholder that receives a constructive dividend cannot apply a dividends received deduction to the distribution.

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 2019. -Premiums paid on key employee life insurance policy assume no increase in cash surrender value of policy) in 2019.

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

Kite Corporation, a calendar year taxpayer, has taxable income of $360,000 for 2020. Among its transactions for the year are the following: Collection of proceeds from insurance policy on life of corporate officer in excess of cash surrender value) $ 9,000 Realized gain not recognized) on an involuntary conversion 10,000 Nondeductible fines and penalties 21,000 Disregarding any provision for Federal income taxes, determine Kite Corporation's current E & P for 2020.

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 to Ashley and Matt taxed? What is Ashley's recognized gain on the sale to Matt?

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 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.

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

On January 30, Juan receives a nontaxable distribution of stock rights from Platinum Corporation. Each right entitles the holder to purchase one share of stock for $40. One right is issued for every share of stock owned. Juan owns 100 shares of stock purchased two years ago for $4,000. At the date of distribution, the rights are worth $1,000 100 rights at $10 per right) and Juan's stock in Platinum is worth $5,000 or $50 per share) . On December 1, Juan sells all 100 stock rights for $12 per right. How much gain does Juan recognize on the sale?

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

Briefly discuss the rules related to distributions of noncash property.

Thistle Corporation declares a nontaxable dividend payable in rights to subscribe to common stock. One right and$25 entitle the holder to subscribe to one share of stock. One right is issued for each share of stock held. Annette, a shareholder, owns 200 shares of stock that she purchased five years ago for $3,000. At the date of distribution of the rights, the market values were $50 per share for the stock and $25 for a right. Annette received 200 rights. She exercises 160 rights and purchases 160 additional shares of stock. She sells the remaining 40 rights for $1,080. What are the tax consequences to Annette?

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 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.)

Pebble 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 of $340,000 at the beginning of the year. This year, however, Pebble earned a significant profit; taxable income was $240,000. Consequently, Pebble 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. ∙ This year's taxable income included a net operating loss carryover of $50,000. ∙ The corporation's Federal income tax liability is $50,400 for the year. ∙ Pebble paid nondeductible fines and kickbacks of $10,000. The company also paid nondeductible life insurance premiums of $22,000. ∙ The cash surrender value of the corporate-owned life insurance policies increased by $11,000 during the year. ∙ The company sold a piece of equipment during the year and reported a § 1231 gain of $105,000 and recapture income under § 1245 of $35,000. There were no other § 1231 transactions during the year, but the corporation did have a capital loss carryforward of $30,000. ∙ MACRS depreciation exceeds E & P depreciation by $14,000. In addition, an election under § 179 was made this year for $18,000 of assets. a. Compute Pebble's E & P for the year. b. What are the tax consequences of the two distributions made during the year to Martha her stock basis is $64,000)?

Silver Corporation, a calendar year taxpayer, has taxable income of $550,000. Among its transactions for the year are the following: $\begin{array}{lr}\text { Collection of proceeds from insurance policy on life of corporate }\\\text { officer (in excess of cash surrender value) } & \$ 82,500 \\\text { Realized gain (not recognized) on an involuntary conversion } & 11,000 \\\text { Nondeductible fines and penalties } & 44,000\end{array}$ Disregarding any provision for Federal income taxes, Silver Corporation's current E & P is:

Robin Corporation distributes furniture basis of $40,000; fair market value of $50,000) as a property dividend to its shareholders. The furniture is subject to a liability of $55,000. Robin Corporation recognizes gain of:

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 and 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 and current E & P before distributions) was $90,000. Which of the following statements is correct?