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Exam 13: Corporations: Earnings and Profits and Distributions

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Question 21

Multiple Choice

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Pheasant Corporation, a calendar year taxpayer, has $400,000 of current E & P and a deficit in accumulated E & P of $180,000.If Pheasant pays a $600,000 distribution to its shareholders on July 1, how much dividend income do the shareholders report?

A) $0
B) $20,000
C) $220,000
D) $400,000
E) None of these.

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

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Question 22

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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.

A) True
B) False

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Question 23

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Tracy and Lance, equal shareholders in Macaw Corporation, receive $600,000 each in distributions on December 31 of the current year.Macaw's current-year taxable income is $1 million and it has no accumulated E & P.Last year, Macaw sold an appreciated asset for $1,200,000 (basis of $400,000) .Payment for one-half of the sale of the asset was made this year.How much of Tracy's distribution will be taxed as a dividend?

Kite Corporation, a calendar year taxpayer, has taxable income of $360,000 for 2020.Among its transactions for the year are the following: Disregarding any provision for Federal income taxes, determine Kite Corporation's current E & P for 2020.

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.

Property distributed by a corporation as a dividend is subject to a liability in excess of its basis.For purposes of determining gain on the distribution, the basis of the property is treated as being not less than the amount of liability.

In the current year, Carnation Corporation has a § 179 expense of $20,000.As a result, in the current year, taxable income must be increased by $16,000 to determine current E & P.

On January 2, 2019, Orange Corporation purchased equipment for $300,000 with an ADS recovery period of 10 years and a MACRS useful life of 7 years.Section 179 was not elected.MACRS depreciation properly claimed on the asset, including depreciation in the year of sale, totaled $79,605.The equipment was sold on July 1, 2020, for $290,000.As a result of the sale, the adjustment to taxable income needed to arrive at current E & P is:

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 2019. a. Increase b. Decrease c. No effect -Proceeds of life insurance received upon the death of a key employee (policy had no cash surrender value).

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.Because Daisy is the sole shareholder of Ostrich, it has a 100% dividends received deduction on the $4 million cash distribution.Thus, Daisy Corporation is not taxed on the $4 million distribution, and it has a gain on the sale of its stock in a.What are the tax consequences to Daisy on the sale? b.What would be the tax consequences if Ostrich had not first distributed the $4 million in cash and Daisy sold the Ostrich stock for $30 million?

Matching 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 2019. a. Increase b. Decrease c. No effect -Section 179 expense in second year following election.

Briefly define the term "earnings and profits."

Ten years ago, Carrie purchased 2,000 shares of common stock 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:

Matching 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 2019. a. Increase b. Decrease c. No effect -Federal income tax refunds from tax paid in prior years.

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

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.

Stephanie is the sole shareholder and president of Hawk Corporation.She feels that she can justify at least a $220,000 bonus this year because of her performance.However, rather than a bonus in the form of a salary, she plans to have Hawk pay her a $220,000 dividend.Because Stephanie's marginal tax rate is 32%, she prefers to receive a dividend taxed at 15%.Her accountant, however, suggests a $275,000 bonus in lieu of the $220,000 dividend since Hawk Corporation is in the 21% tax bracket.Should Stephanie take the $220,000 dividend or the $275,000 bonus? Support your answer by computing the after-tax cost of the two alternatives to Hawk and to Stephanie.

A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation's E & P.

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 2019. a. Increase b. Decrease c. No effect -Gain realized (but not recognized) on a like-kind exchange.

If there is sufficient E & P, a distribution of nonconvertible preferred stock to common shareholders is taxable.