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Exam 13: Corporate Nonliquidating and Liquidating Distributions

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Question 51

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Which of these items is not an adjustment to taxable income to compute current E&P? 

A) Dividends received deduction.
B) Tax-exempt income.
C) Net capital loss carryforward from the prior year tax return.
D) All of the choices are adjustments.

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

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Question 52

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Elk Company reports negative current E&P of $200,000 and positive accumulated E&P of $300,000.Elk distributed $200,000 to its sole shareholder,Barney Rubble,on December 31,year 1.Barney's tax basis in his Elk stock is $75,000.What is the tax treatment of the distribution to Barney and what is his tax basis in Elk stock after the distribution?

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$100,000 dividend income,$75,000 nontaxa...

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Question 53

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Buckeye Company is owned equally by James and his brother Terrelle,each of whom own 500 shares in the company.Terrelle wants to reduce his ownership in the company,and it was decided that the company will redeem 200 of his shares for $5,000 per share on December 31,year 1.Terrelle's income tax basis in each share is $1,000.Buckeye has current E&P of $10,000,000 and accumulated E&P of $20,000,000.What is the amount and character (capital gain or dividend)recognized by Terrelle as a result of the stock redemption?

Wonder Corporation declared a common stock distribution to all shareholders of record on September 30,year 1.Shareholders will receive three shares of Wonder stock for each five shares of stock they already own.Diana owns 300 shares of Wonder stock with a tax basis of $90 per share (a total basis of $27,000) .The fair market value of the Wonder stock was $180 per share on September 30,year 1.What are the tax consequences of the stock distribution to Diana?

Which statement best describes the concept of the double taxation of corporate income?

Comet Company is owned equally by Pat and his sister Pam,each of whom hold 100 shares in the company.Pam wants to reduce her ownership in the company,and it was decided that the company will redeem 50 of her shares for $1,000 per share on December 31,year 1.Pam's income tax basis in each share is $500.Comet has total E&P of $250,000.What are the tax consequences to Pam as a result of the stock redemption?

Viking Corporation is owned equally by Sven and his wife Olga,each of whom hold 100 shares in the company.Viking redeemed 75 shares of Sven's stock in the company on December 31,year 1.Viking paid Sven $2,000 per share.His income tax basis in each share is $1,000.Viking has total E&P (current plus accumulated) of $500,000.What are the tax consequences to Sven as a result of the stock redemption?

Sherburne Corporation reported current earnings and profits for year 1 of $500,000.During the year,the company made a distribution of land to its sole shareholder,Ted Bozeman.The land's fair market value was $150,000 and its tax and E&P basis to Sherburne was $100,000.Ted assumed a mortgage attached to the land of $25,000.What amount of dividend income does Ted report as a result of the distribution and what is Ted's income tax basis in the land received from Sherburne?

Grand River Corporation reported taxable income of $500,000 in year 1 and paid federal income taxes of $105,000.Not included in the computation was a disallowed meals  expense of $2,000,tax exempt income of $1,000,and deferred gain on an installment sale of $25,000.The corporation's current earnings and profits for year 1 would be:

Greenwich Corporation reported a net operating loss of $800,000 in year 1.Not included in the year 1 taxable income computation were a disallowed fine of $50,000,life insurance proceeds of $500,000,and a current year charitable contribution of $10,000 that will be carried forward to year 2.The corporation's current earnings and profits for year 1 would be:

Diego owns 30 percent of Azul Corporation.Azul Corporation owns 50 percent of Verde Corporation.Under the attribution rules applying to stock redemptions,Diego is treated as owning 15 percent of Verde Corporation.

Walloon,Inc.reported taxable income of $1,000,000 in year 2 and paid federal income taxes of $210,000.The company reported a capital gain from sale of investments of $150,000,which was partially offset by a $40,000 net capital loss carryover from year 1,resulting in a net capital gain of $110,000 included in taxable income.Compute the company's current E&P for year 2.

Green Corporation has current earnings and profits of $100,000 and negative accumulated earnings and profits of $(200,000).A $50,000 distribution from Green to its sole shareholder will not be treated as a dividend because total earnings and profits is a negative $100,000.

The recipient of a taxable stock distribution will have a tax basis in the stock equal to the fair market value of the stock received.

Gary and Laura decided to liquidate their jointly owned corporation,Amelia,Inc.After liquidating its remaining inventory and paying off its remaining liabilities,Amelia had the following tax accounting balance sheet. $\begin{array}{ccc}&\text { Tax Basis}&\text { FMV}&\text { (Appreciation)}\\\text { Cash}&\$ 100,000 & \$ 100,000 & \\\text { Building}&150,000& 200,000 & 50,000 \\\text { Land}&\underline {50,000 }& \underline {120,000}& \underline {70,000} \\\text { Total}&\underline {\$ 300,000}&\underline { \$ 420,000} &\underline {\$ 120,000}\\\end{array}$   Under the terms of the agreement,Gary will receive the $100,000 cash in exchange for his interest in Amelia.Gary's tax basis in his Amelia stock is $30,000.Laura will receive the building and land in exchange for her interest in Amelia.Laura's tax basis in her Amelia stock is $60,000. What amount of gain or loss does Gary recognize in the complete liquidation?

Yellowstone Corporation made a distribution of $300,000 to Cheney,Inc.in partial liquidation of the company on December 31,year 1.Cheney,Inc.owns 50 percent of Yellowstone Corporation (1,000 shares).The other 50 percent is owned by an unrelated corporation.The distribution was in exchange for 50% of Cheney's stock in the company (500 shares).At the time of the distribution,the shares had a fair market value of $800 per share.Cheney's income tax basis in the shares was $500 per share.Yellowstone had total E&P of $5,000,000 at the time of the distribution.What is the amount and character (capital gain or dividend)of any income or gain recognized by Cheney as a result of the partial liquidation?

Inca Company reports current E&P of negative $100,000 in year 1 and accumulated E&P at the beginning of the year of $200,000.Inca distributed $300,000 to its sole shareholder on January 1,year 1.How much of the distribution is treated as a dividend in year 1?

Tammy owns 60 percent of the stock of Huron Corporation.Unrelated individuals own the remaining 40 percent.For a stock redemption to be treated as an exchange under the "substantially disproportionate" rule,Tammy must reduce her stock ownership to below 48 percent.

A corporation's "earnings and profits" account is equal to the company's "retained earnings" account on its balance sheet.

Madison Corporation reported taxable income of $400,000 in year 2 and accrued federal income taxes of $84,000.Included in the year 2 taxable income computation were regular depreciation of $200,000 (E&P depreciation is $60,000) ,first year expensing under §179 of $100,000,and a net capital loss carryover of $20,000 from year 1.The corporation's current earnings and profits for year 2 would be: