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Exam 13: Corporations: Earnings Profits and Distributions

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Question 51

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

A) All tax-exempt income should be added back to taxable income.
B) Dividends received deductions should be added back to taxable income.
C) Charitable contributions in excess of the 10% of taxable income limit should be subtracted from taxable income.
D) Federal income tax refunds should be added back to taxable income.
E) None of the above statements are incorrect.

F) D) and E)
G) A) and B)

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Question 52

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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:

A) The shareholders have dividend income of $200,000.
B) The shareholders have dividend income of $260,000.
C) Warbler has a recognized gain of $30,000 and a recognized loss of $30,000.
D) Warbler has no recognized gain or loss.
E) None of the above.

F) C) and D)
G) B) and D)

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Question 53

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Provide a brief outline on computing current E & P.

Tanya is in the 33% tax bracket. She acquired 1,000 shares of stock in Swan Corporation seven years ago for $100 a share. In the current year, Swan Corporation (E & P of $1.2 million) redeems all of her shares for $160,000. What are the income tax consequences to Tanya if: a.The redemption qualifies for sale or exchange treatment, and Tanya has no other transactions in the current year involving capital assets? b.The redemption does not qualify for sale or exchange treatment?

Rust Corporation distributes property to its sole shareholder, Andre. The property has a fair market value of $350,000, an adjusted basis of $205,000, and is subject to a liability of $220,000. Current E & P is $500,000. With respect to the distribution, which of the following statements is correct?

To determine E & P, some (but not all) previously excluded income items are added back to taxable income.

Tungsten Corporation, a calendar year cash basis taxpayer, made estimated tax payments of $800 each quarter in 2016, for a total of $3,200. Tungsten filed its 2016 tax return in 2017 and the return showed a tax liability $4,200. At the time of filing, March 15, 2017, Tungsten paid an additional $1,000 in Federal income taxes. How does the additional payment of $1,000 impact Tungsten's E & P?

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.

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

Distributions by a corporation to its shareholders are presumed to be a dividend unless the parties can prove otherwise.

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 2016. -Domestic production activities deduction claimed in 2016.

Rose Corporation (a calendar year taxpayer) has taxable income of $300,000, and its financial records reflect the following for the year. ​ Rose Corporation's current E & P is:

All 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.

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 2016. -Section 179 expense in second year following election.

All distributions that are not dividends are a return of capital and decrease the shareholder's basis.

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 2016. -Federal income tax refunds from tax paid in prior years.

Cedar Corporation is a calendar year taxpayer formed in 2012. Cedar's E & P for each of the past 5 years is listed below. ​ Cedar Corporation made the following distributions in the previous 5 years. ​ Cedar's accumulated E & P as of January 1, 2017 is:

Ivory Corporation (E & P of $1 million) has 2,000 shares of common stock outstanding owned by unrelated parties as follows: Veronica, 1,000 shares, and Tommie, 1,000 shares. Veronica and Tommie each paid $150 per share for the Ivory stock 12 years ago. In May of the current year, Ivory distributes land held as an investment (basis of $180,000, fair market value of $390,000) to Veronica in redemption of 350 of her shares. a.What are the tax results to Veronica on the redemption of her Ivory stock? b.What are the tax results to Ivory Corporation on the distribution of the land?

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:

Sylvia owns 25% of Cormorant Corporation. Cormorant 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?