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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 1

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Regardless of any deficit in current E & P, distributions during the year are taxed as dividends to the extent of accumulated E & P.

A) True
B) False

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Question 2

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Explain the stock attribution rules that apply in the case of stock redemptions.

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In general, the § 318 stock attribution ...

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Question 3

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At the beginning of the current year, Doug and Alfred each own 50% of Amaryllis Corporation (a calendar year taxpayer) .In July, Doug sold his stock to Kevin for $140,000.At the beginning of the year, Amaryllis Corporation had accumulated E & P of $240,000 and its current E & P is $280,000 (prior to any distributions) .Amaryllis distributed $300,000 on February 15 ($150,000 to Doug and $150,000 to Alfred) and distributed another $300,000 on November 1 ($150,000 to Kevin and $150,000 to Alfred) .Kevin has dividend income of:

A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation's E & P.

A corporation borrows money to purchase State of Texas bonds.The interest on the loan has no impact on either taxable income or current E & P.

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?

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?

During the year, Blue Corporation distributes land to its sole shareholder.If the fair market value of the land is less than its adjusted basis, Blue will recognize a loss on the distribution.

The tax treatment of corporate distributions at the shareholder level does not depend on:

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.

Distributions that are not dividends are a return of capital and decrease the shareholder's basis.Once basis is reduced to zero, any excess is taxed as a capital gain.

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

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

Vireo Corporation redeemed shares from its sole shareholder pursuant to a written agreement between the parties that clearly identified the transaction as a stock redemption (and not a dividend distribution). Since the agreement is binding under state law, the shareholder will receive sale or exchange treatment with respect to the redemption.

Glenda is the sole shareholder of Condor Corporation.She sold her stock to Melissa on October 31 for $150,000.Glenda's basis in Condor stock was $50,000 at the start of the year.Condor distributed land to Glenda immediately before the sale.Condor's basis in the land was $20,000 (fair market value of $25,000) .On December 31, Melissa received a $75,000 cash distribution from Condor.During the year, Condor has $20,000 of current E & P and its accumulated E & P balance on January 1 is $10,000.Which of the following statements is true?

On January 1, Gull Corporation (a calendar year taxpayer) has accumulated E & P of $200,000.During the year, Gull incurs a net loss of $280,000 from operations that accrues ratably.On June 30, Gull distributes $120,000 to Sharon, its sole shareholder, who has a basis in her stock of $75,000.How much of the $120,000 is a dividend to Sharon?

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 Corporation 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.)

Certain dividends from foreign corporations can be qualified dividends for purposes of the 15% rate available to individuals.

When is a redemption to pay death taxes under § 303 most advantageous?

Nondeductible meal and entertainment expenses must be subtracted from taxable income to determine current E & P.