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Exam 5: Corporations: Earnings Profits and Dividend Distributions

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Question 1

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In the current year,Verdigris Corporation (with E & P of $250,000) made the following property distributions to its shareholders (all corporations) : Verdigris Corporation is not a member of a controlled group.As a result of the distribution:

A) The shareholders have dividend income of $100,000.
B) The shareholders have dividend income of $130,000.
C) Verdigris has a gain of $15,000 and a loss of $15,000,both of which it must recognize.
D) Verdigris has no recognized gain or loss.
E) None of the above.

F) A) and E)
G) None of the above

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E

Question 2

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Violet Corporation is the sole shareholder of Finch Corporation,which it hopes to sell within the next three years.The Finch stock (basis of $28 million)is currently worth $33 million,but Violet believes that it would be easier to find a buyer if it was worth less.To lower the value of its stock,Finch distributes $3 million cash to Violet (sufficient E & P exists to cover the distribution).At a later date,Violet sells Finch for $30 million.

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Question 3

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A corporation borrows money to purchase State of Texas bonds.The interest on the loan has an impact on both taxable income and current E & P.

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 treated as a return of capital.

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?

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?

In the current year,Pink Corporation has a § 179 expense of $80,000.As a result,next year,taxable income must be decreased by $16,000 to determine current E & P.

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

The rules used to determine the taxability of stock dividends also apply to distributions of stock rights.

Which of the following is not an economic distortion created by the double tax on dividends?

During the current year,Gander Corporation sold equipment for $250,000 (adjusted basis of $130,000) .The equipment was purchased a few years ago for $280,000 and $150,000 in MACRS deductions have been claimed.ADS depreciation would have been $100,000.As a result of the sale,the adjustment to taxable income needed to determine E & P is:

If a stock dividend is taxable,the shareholder's basis of the newly received shares is determined by reallocating the basis of the previously owned stock.

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.

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.

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?

Distributions that are not dividends are a return of capital and cause the shareholder's capital account to increase.

In August,Sunglow Corporation declares a $4 dividend out of E & P on each share of common stock to shareholders of record on October 1.Elaine and Tom each purchase 100 shares of Sunglow stock on September 1.On September 15,Elaine also purchases a short position in Sunglow.Tom sells 50 of his shares on October 15 and continues to hold the remaining 50 shares through the end of the year.Elaine closes her short position in Sunglow on December 15.With respect to the dividends,which of the following is correct?

As of January 1,Warbler Corporation has a deficit in accumulated E & P of $150,000.For the year,current E & P (accrued ratably) is $260,000 (prior to any distributions) .On July 1,Warbler Corporation distributes $295,000 to its sole shareholder.The amount of the distribution that is a dividend is:

Falcon Corporation has $200,000 of current E & P and a deficit in accumulated E & P of $90,000.If Swan pays a $300,000 distribution to its shareholders on July 1,how much dividend income do the shareholders report?

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