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Exam 5: Corporations: Earnings Profits and Dividend Distributions

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Question 31

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Ashley and Andrew,equal shareholders in Parrot Corporation,receive $250,000 each in distributions on December 31 of the current year.During the current year,Parrot sold an appreciated asset for $500,000 (basis of $150,000) .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 7.5%.Before considering the effect of the asset sale,Parrot's current year E & P is $400,000 and it has no accumulated E & P.How much of Ashley's distribution will be taxed as a dividend?

A) $0.
B) $200,000.
C) $250,000.
D) $425,000.
E) None of the above.

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

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Question 32

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A distribution in excess of E & P is treated as capital gain by shareholders.

A) True
B) False

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Question 33

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When current E & P is positive and accumulated E & P has a deficit balance,the two accounts are netted for dividend determination purposes.

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

Purple Corporation has accumulated E & P of $100,000 on January 1,2012.In 2012,Purple has current E & P of $130,000 (before any distribution) .On December 31,2012,the corporation distributes $250,000 to its sole shareholder,Cindy (an individual) .Purple Corporation's E & P as of January 1,2013 is:

When computing E & P,taxable income is not adjusted for additional first-year depreciation.

Gander,a calendar year corporation,has a deficit in current E & P of $100,000 and a $290,000 positive balance in accumulated E & P.If Gander determines that a $500,000 distribution to its shareholders is appropriate at some point during the year,what is the maximum amount of the distribution that could potentially be treated as a dividend?

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

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

Scarlet Corporation (a calendar year taxpayer) has taxable income of $150,000,and its financial records reflect the following for the year. Scarlet Corporation's current E & P is:

On January 1,Tulip Corporation (a calendar year taxpayer)has accumulated E & P of $300,000.Its current E & P for the year is $90,000 (before considering dividend distributions).During the year,Tulip distributes $600,000 ($300,000 each)to its equal shareholders,Anne and Tom.Anne has a basis in her stock of $65,000,while Tom's basis is $120,000.What is the effect of the distribution by Tulip Corporation on Anne and Tom?

Falcon Corporation ended its first year of operations with taxable income of $250,000.At the time of Falcon's formation,it incurred $50,000 of organizational expenses.In calculating its taxable income for the year,Falcon claimed an $8,000 deduction for the organizational expenses.What is Falcon's current E & P?

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?

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?

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

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

Tangelo Corporation has an August 31 year-end.Tangelo had $50,000 in accumulated E & P at the beginning of its 2012 fiscal year (September 1,2011) and during the year,it incurred a $75,000 operating loss.It also distributed $65,000 to its sole shareholder,Cass,on November 30,2011.If Cass is a calendar year taxpayer,how should she treat the distribution when she files her 2011 income tax return (assuming the return is filed by April 15,2012) ?

Stacey and Andrew 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 Andrew on May 1.If Parakeet's current E & P is $60,000,how much is allocated to Andrew's distribution?

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.

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.