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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 41

True/False

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When a corporation makes an installment sale,for E & P purposes the realized gain is recognized in the year of sale.

A) True
B) False

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Question 42

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In the current year,Loon Corporation made a distribution in redemption of some of its shares.Loon incurred expenditures in connection with the redemption totaling $35,000 (accounting fees of $9,000,legal fees of $20,000,and brokerage fees of $6,000) .The distribution was a qualifying stock redemption.How much of the $35,000 is deductible in the current year?

A) $6,000.
B) $9,000.
C) $29,000.
D) $35,000.
E) None of the above.

F) A) and E)
G) A) and C)

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Question 43

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Scarlet Corporation (a calendar year taxpayer) has taxable income of $150,000,and its financial records reflect the following for the year. Scarlet Corporation's current E & P is:

Ten years ago,Connie purchased 4,000 shares in Platinum Corporation for $40,000.In the current year,Connie receives a nontaxable stock dividend of 40 shares of Platinum 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,Connie's basis is:

What are the tax consequences of a qualifying stock redemption to the distributing corporation?

Julian,Berta,and Maria own 400 shares,400 shares,and 200 shares,respectively,in Caramel Corporation (E & P of $750,000) .Berta is Julian's sister,and Maria is Julian's aunt.Caramel Corporation redeems all of Julian's stock for $420,000.Julian paid $200 a share for the stock five years ago.Julian continued to serve on Caramel's board of directors after the redemption.With respect to the redemption:

A shareholder's basis in property received in a stock redemption is the property's fair market value.

Dividends taxed as ordinary income are considered investment income for purposes of the investment interest expense limitation.

Which one of the following statements is false?

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

Gold Corporation has accumulated E & P of $2 million as of January 1 of the current year.During the year,it expects to have earnings from operations of $1,680,000 and to distribute $900,000 in cash to shareholders.Gold Corporation also expects to sell an asset for a loss of $2 million.Thus,it anticipates incurring a deficit of $320,000 for the year.What can Gold do to minimize the amount of dividend income to its shareholders?

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.

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

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?

Hannah,Greta,and Winston own the stock in Redpoll Corporation (E & P of $900,000) as follows: Hannah,600 shares; Greta,400 shares; and Winston,1,000 shares.Greta is Hannah's daughter,and Winston is Hannah's brother.Redpoll Corporation redeems 400 of Hannah's shares (basis of $55,000) for $240,000.Hannah purchased the stock three years ago as an investment.With respect to the stock redemption,Hannah has:

Grackle Corporation (E & P of $600,000)distributes cash of $200,000 and land (fair market value of $400,000; basis of $250,000)to a shareholder in a qualifying stock redemption.The land distributed is subject to a mortgage of $460,000.Grackle will recognize a gain of $150,000 as a result of the distribution.

Lucinda owns 1,100 shares of Blackbird Corporation stock at a time when Blackbird has 2,000 shares of stock outstanding.The remaining shareholders are unrelated to Lucinda.What is the minimum number of shares Blackbird must redeem from Lucinda so that the transaction will qualify as a disproportionate redemption?

Daisy Corporation is the sole shareholder of Ostrich Corporation,which it hopes to sell within the next three years.The Ostrich stock (basis of $25 million)is currently worth $30 million,but Daisy believes that it would be easier to find a buyer if it was worth less.To lower the value of its stock,Ostrich distributes $4 million cash to Daisy (sufficient E & P exists to cover the distribution).At a later date,Daisy sells Ostrich for $26 million.

A shareholder's holding period of property acquired in a stock redemption begins on the date of the distribution.

The terms "earnings and profits" and "retained earnings" are identical in meaning.