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Exam 13: Corporations: Earnings and Profits and Distributions

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Question 41

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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 42

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

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(1) Current E & P is applied first to di...

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Question 43

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What is a constructive dividend? Provide several examples of the term.

Matching 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. a. Increase b. Decrease c. No effect -Loss on sale between related parties in 2019.

Sylvia owns 25% of Cormorant Corporation, which 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?

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?

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

Which of the following statements is incorrect with respect to determining current E & P?

Brett owns stock in Oriole Corporation (basis of $100,000) as an investment.Oriole distributes property (fair market value of $375,000; basis of $187,500) to him during the year.Oriole has current E & P of $25,000 (which includes the E & P gain on the property distribution) , accumulated E & P of $100,000, and makes no other distributions during the year.What is Brett's capital gain on the distribution?

Finch Corporation distributes property (basis of $225,000, fair market value of $300,000) to a shareholder in a distribution that is a qualifying stock redemption.The property is subject to a liability of $160,000, which the shareholder assumes.The basis of the property to the shareholder is:

Puffin Corporation makes a property distribution to its sole shareholder, Bonnie.The property distributed is a car (basis of $30,000; fair market value of $20,000) that is subject to a $6,000 liability, which Bonnie assumes.Puffin has no accumulated E & P and $30,000 of current E & P from other sources during the year.What is Puffin's E & P after taking into account the distribution of the car?

When computing E & P, taxable income is not adjusted for § 179 expense.

When current E & P has a deficit and accumulated E & P is positive, the two accounts are netted at the date of the distribution.If a positive balance results, the distribution is a dividend to the extent of the balance.

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

Purple Corporation makes a property distribution to its sole shareholder, Kyung.The property distributed is a house (fair market value of $189,000; basis of $154,000) that is subject to a $245,000 mortgage that Kyung assumes.Before considering the consequences of the distribution, Purple's current E & P is $35,000 and its accumulated E & P is $140,000.Purple makes no other distributions during the current year.What is Purple's taxable gain on the distribution of the house?

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?

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.

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?

Federal income tax paid in the current year must be subtracted from taxable income to determine E & P.

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: