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Exam 10: Corporations: Earnings Profits and Distributions

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Question 51

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Briefly discuss the rules related to distributions of non-cash property.

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Amounts distributed as dividends in the ...

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Question 52

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When computing current E & P,taxable income must be adjusted for the deferred gain in a § 1031 like-kind exchange.

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Question 53

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Ten years ago,Carrie purchased 2,000 shares in Osprey Corporation for $20,000.In the current year,Carrie receives a nontaxable stock dividend of 20 shares of Osprey preferred.Values at the time of the dividend are: $8,000 for the preferred stock and $72,000 for the common.Based on this information,Carrie's basis in the stock is:

When computing E & P,taxable income is not adjusted for § 179 expense.

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

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

On January 1,Gold Corporation (a calendar year taxpayer)has E & P of $30,000 and generates no additional E & P during the year.On March 31,the corporation distributes $40,000 to its sole shareholder,Wyatt (basis in stock of $8,000).Determine the effect of the distribution on Wyatt's taxable income and stock basis.

Christian,the president and sole shareholder of Venture Corporation,is paid an annual salary of $150,000.Christian would like to draw additional funds from the corporation but is concerned that increased salary might cause the IRS to contend his salary is unreasonable.Further,Christian does not want the corporation to pay any dividends.He would like to contribute $40,000 to his alma mater to establish scholarships for needy students.If Christian makes a pledge to the university to provide $40,000 for scholarships,would there be a problem if Venture Corporation paid the pledge on his behalf? Explain.

Cedar Corporation is a calendar year taxpayer formed in 2009.Cedar's E & P for each of the past 5 years is listed below. $\begin{array} { l l } 2013 & \$ 28,000 \\2012 & \$ 40,000 \\2011 & \$ 39,000 \\2010 & \$ 68,000 \\2009 & \$ 16,000\end{array}$ Cedar Corporation made the following distributions in the previous 5 years. 2012 $~~~~~~~~$ Land (basis of $70,000, fair market value of $80,000) 2009 $~~~~~~~~$ $20,000 cash Cedar's accumulated E & P as of January 1,2014 is:

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

Provide a brief outline on computing current E & P.

Robin Corporation distributes furniture (basis of $40,000; fair market value of $50,000) as a property dividend to its shareholders.The furniture is subject to a liability of $55,000.Robin Corporation recognizes gain of:

Tungsten Corporation,a calendar year cash basis taxpayer,made estimated tax payments of $800 each quarter in 2013,for a total of $3,200.Tungsten filed its 2013 tax return in 2014 and the return showed a tax liability $4,200.At the time of filing,March 15,2014,Tungsten paid an additional $1,000 in Federal income taxes.How does the additional payment of $1,000 impact Tungsten's E & P?

In general,if a shareholder's ownership interest is not diminished as a result of a stock redemption,the Code will treat the transaction as a sale or exchange.

Pursuant to a liquidation,Coral Corporation distributes to Lucinda,a shareholder,land (basis of $90,000,fair market value of $200,000).The land is subject to a $75,000 liability.Lucinda will have a basis of $125,000 in the land.

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.

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 not be able to recognize a loss on the distribution.

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.

Rose Corporation (a calendar year taxpayer) has taxable income of $300,000,and its financial records reflect the following for the year. $\begin{array}{ll}\text { Federal income taxes paid } & \$ 110,000 \\\text { Net operating loss caryforward deducted currently } & 70,000 \\\text { Gain recogrized this year on an installment s ale from a prior year } & 44,000 \\ \text { Iepreciation deducted on tax return (ADS depreciationwould have beer } \$ 10,000) & 40,000 \\\text { Interest income on Iowa state bonds. } & 8,000\end{array}$ Rose Corporation's current E & P is:

Kite Corporation,a calendar year taxpayer,has taxable income of $360,000 for 2014.Among its transactions for the year are the following: $\begin{array}{ll}\text { Collection of proceeds from insurance policy on life of carporate } \\\text { officer (in excess of cash surender value) } & \$ 9,000 \\\text { Realized gain(not recognized) on an involuntary conversion } & 10,000 \\\text { Nondeductible fines and penalties } & 21,000\end{array}$