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Exam 5: Corporations: Earnings Profits and Dividend Distributions

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Question 41

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Silver Corporation, a calendar year taxpayer, has taxable income of $550,000. 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) $82,500 Realized gain (not recognized) on an involuntary conversion 11,000 Nondeductible fines and penalties 44,000 Disregarding any provision for Federal income taxes, Silver Corporation's current E & P is:

A) $500,500.
B) $588,500.
C) $599,500.
D) $687,500.
E) None of the above.

F) A) and C)
G) B) and E)

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Question 42

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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.

A) True
B) False

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Question 43

Multiple Choice

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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?

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

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 2014. a. Increase b. Decrease c. No effect -Federal income tax refunds from tax paid in prior years.

Tungsten Corporation, a calendar year cash basis taxpayer, made estimated tax payments of $800 each quarter in 2014, for a total of $3,200. Tungsten filed its 2014 tax return in 2015 and the return showed a tax liability $4,200. At the time of filing, March 15, 2015, Tungsten paid an additional $1,000 in Federal income taxes. How does the additional payment of $1,000 impact Tungsten's 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?

A corporation that distributes a property dividend must reduce its E & P by the adjusted basis of the property less any liability on the property.

On January 1, Gold Corporation (a calendar year taxpayer) has E & P of $30,000 and generates no additional E & P during the year. On March 31, the corporation distributes $40,000 to its sole shareholder, Wyatt (basis in stock of $8,000). Determine the effect of the distribution on Wyatt's taxable income and stock basis.

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

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

To determine current E & P, taxable income must be increased for any domestic production activities deduction.

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?

If stock rights are taxable, the recipient has income to the extent of the fair market value of the rights.

Tangelo Corporation has an August 31 year-end. Tangelo had $50,000 in accumulated E & P at the beginning of its 2015 fiscal year (September 1, 2014) and during the year, it incurred a $75,000 operating loss. It also distributed $65,000 to its sole shareholder, Cass, on November 30, 2014. If Cass is a calendar year taxpayer, how should she treat the distribution when she files her 2014 income tax return (assuming the return is filed by April 15, 2015) ?

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 2014. a. Increase b. Decrease c. No effect -Proceeds of life insurance received upon the death of a key employee (policy had no cash surrender value).

Under certain circumstances, a distribution can generate (or add to) a deficit in 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 2014. a. Increase b. Decrease c. No effect -Cash dividends distributed to shareholders in 2014.

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 rationale for the reduced tax rate on dividends for individual taxpayers.