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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 1

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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 2015. a.Increase b.Decrease c.No effect -Meal and entertainment expenses not deducted in 2015 because of the 50% limitation.

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Explain the stock attribution rules that apply in the case of stock redemptions.

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In general,the § 318 stock attribution r...

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

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

Ashley,the sole shareholder of Hawk Corporation,has a stock basis of $200,000 at the beginning of the year.On July 1,she sells all of her stock to Matt for $1 million.On January 1,Hawk has accumulated E & P of $90,000 and during the year,current E & P of $160,000.Hawk makes the following cash distributions: $270,000 to Ashley on March 31 and $90,000 to Matt on December 1.How are the distributions taxed to Ashley and Matt? What is Ashley's recognized gain on the sale to Matt?

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?

Tungsten Corporation,a calendar year cash basis taxpayer,made estimated tax payments of $800 each quarter in 2015,for a total of $3,200.Tungsten filed its 2015 tax return in 2016 and the return showed a tax liability $4,200.At the time of filing,March 15,2016,Tungsten paid an additional $1,000 in Federal income taxes.How does the additional payment of $1,000 impact Tungsten's E & P?

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.

If a stock dividend is taxable,the shareholder's basis in the newly received shares is equal to the fair market value of the shares received in the distribution.

To carry out a qualifying stock redemption,Turaco Corporation (E & P of $800,000) transfers land held for investment purposes to Aida,a shareholder.The land had a basis of $250,000,a fair market value of $400,000,and is subject to a $300,000 liability.Aida has a basis of $70,000 in the shares redeemed.Which of the following is a correct statement regarding the tax consequences of this redemption?

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 2015. a.Increase b.Decrease c.No effect -Section 179 expense in second year following election.

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

Pebble Corporation,an accrual basis taxpayer,has struggled to survive since its formation,six years ago.As a result,it has a deficit in accumulated E & P at the beginning of the year of $340,000.This year,however,Pebble earned a significant profit;taxable income was $240,000.Consequently,Pebble made two cash distributions to Martha,its sole shareholder: $150,000 on July 1 and $200,000 December 31.The following information might be relevant to determining the tax treatment of the distributions. ∙ This year's taxable income included a net operating loss carryover of $50,000. ∙ The corporation's Federal income tax liability is $72,000 for the year. ∙ Pebble paid nondeductible fines and kickbacks of $10,000.The company also paid nondeductible life insurance premiums of $22,000. ∙ The cash surrender value of the corporate-owned life insurance policies increased by $11,000 during the year. ∙ ​ The company sold a piece of equipment during the year and reported a § 1231 gain of $105,000 and recapture income under § 1245 of $35,000.There were no other § 1231 transactions during the year,but the corporation did have a capital loss carryforward of $30,000. ∙ MACRS depreciation exceeds E & P depreciation by $14,000.In addition,an election under § 179 was made this year for $18,000 of assets. ​ a.Compute Pebble's E & P for the year. b.​ What are the tax consequences of the two distributions made during the year to Martha (her stock basis is $74,000)?

A corporate shareholder that receives a constructive dividend cannot apply a dividends received deduction to the distribution.

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

An increase in the LIFO recapture amount must be added to taxable income to determine E & P.

Coffee Corporation has 2,000 shares of common stock outstanding.John owns 700 of the shares,John's grandfather owns 100 shares,John's father owns 100 shares,John's ex-wife owns 700 shares,and Redbird Partnership owns 400 shares.John is a 50% partner in Redbird Partnership.How many shares is John deemed to own in Coffee Corporation under the § 318 attribution rules?

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.

adjusted to arrive at current E & P for 2015. a.Increase b.Decrease c.No effect -Gain realized (but not recognized) on a like-kind exchange.

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.