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Exam 7: Corporate Taxation: Nonliquidating Distributions

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Question 41

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Which of the following forms of earnings distributions would not be subject to double taxation at the corporate and shareholder level?

A) Dividend.
B) Stock redemption.
C) Partial liquidation.
D) Compensation paid to a shareholder/employee of the corporation.

E) A) and C)
F) C) and D)

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Question 42

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General Inertia Corporation made a distribution of $50,000 to Henry Tiara in partial liquidation of the company on December 31, 20X3. Henry owns 500 shares (50 percent) of General Inertia. The distribution was in exchange for 250 shares of Henry's stock in the company. After the partial liquidation, Henry continued to own 50 percent of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Henry's income tax basis in the shares was $100 per share. General Inertia had total E&P of $800,000 at the time of the distribution. What are the tax consequences to Henry because of the transaction?

A) Henry has dividend income of $50,000 and a tax basis in his remaining shares of $100 per share.
B) Henry has capital gain of $25,000 and a tax basis in his remaining shares of $100 per share.
C) Henry has dividend income of $50,000 and a tax basis in his remaining shares of $200 per share.
D) Henry has capital gain of $25,000 and a tax basis in his remaining shares of $200 per share.

E) A) and D)
F) A) and C)

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Question 43

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Grand River Corporation reported taxable income of $500,000 in 20X3 and paid federal income taxes of $170,000. Not included in the computation was a disallowed meals and entertainment expense of $2,000, tax-exempt income of $1,000, and deferred gain on a current-year transaction treated as an installment sale of $25,000. The corporation's current E&P for 20X3 would be:

Crystal, Inc. is owned equally by John and his wife, Arlene, each of whom own 500 shares in the company. Arlene wants to reduce her ownership in the company, and it was decided that the company will redeem 200 of her shares for $5,000 per share on December 31, 20X3. Arlene's income tax basis in each share is $1,000. Crystal has current E&P of $1,000,000 and accumulated E&P of $3,000,000. What is the amount and character (capital gain or dividend) recognized by Arlene as a result of the stock redemption, assuming only the "substantially disproportionate with respect to the shareholder" test is applied?

Wonder Corporation declared a common stock distribution to all shareholders of record on September 30, 20X3. 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, 20X3. What are the tax consequences of the stock distribution to Diana?

Paladin Corporation had current and accumulated E&P of $500,000 at December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Maria Mendez. The land's fair market value was $200,000 and its tax and E&P basis to Paladin was $250,000. Maria assumed a liability of $25,000 attached to the land. The tax consequences of the distribution to Paladin in 20X3 would be:

The term "E&P" is well-defined in the Internal Revenue Code.

El Toro Corporation declared a common stock distribution to all shareholders of record on June 30, 20X3. Shareholders will receive one share of El Toro stock for each two shares of stock they already own. Raoul owns 300 shares of El Toro stock, with a tax basis of $60 per share. The fair market value of the El Toro stock was $100 per share on June 30, 20X3. What are the tax consequences of the stock distribution to Raoul?

Ozark Corporation reported taxable income of $500,000 from operations for 20X3. During the year, the company made a distribution of land to its sole shareholder, Marcus Twain. The land's fair market value was $100,000 and its tax and E&P basis to Ozark was $125,000. Marcus assumed a mortgage attached to the land of $25,000. Ozark's tax rate is 21 percent. The company had accumulated E&P of $850,000 at the beginning of the year. Compute Ozark's total taxable income and federal income tax paid because of the distribution. Using your solution, compute Ozark's accumulated E&P at January 1, 20X4.

Sweetwater Corporation declared a stock distribution to all common stock shareholders of record on December 31, 20X3. Shareholders will receive one share of Sweetwater common stock for each five shares of common stock they already own. Pierre Dorgan owns 500 shares of Sweetwater common stock, with a tax basis of $150 per share. The fair market value of the Sweetwater common stock was $90 per share on December 31. What is Pierre's income tax basis per share in his new and existing common stock in Sweetwater, assuming the distribution is nontaxable?

Wildcat Corporation reports a deficit in current E&P of ($200,000) in 20X3 and accumulated E&P at the beginning of the year of $100,000. Wildcat distributed $300,000 to its sole shareholder on December 31, 20X3. How much of the distribution is treated as a dividend in 20X3?

Erie Corporation reported taxable income of $2,200,000 in 20X3 before any deduction for any payment to its sole shareholder and employee, LaBron Cleveland. Erie paid a bonus of $200,000 to LaBron at year-end. Erie Corporation is subject to a flat-rate tax of 21 percent. The bonus meets the requirements to be "reasonable" and is therefore deductible by Erie. LaBron is subject to a marginal tax rate of 35 percent on the bonus. What is the total federal income tax imposed on the corporate income earned by Erie and paid to LaBron as a bonus?

Aztec Company reports current E&P of $200,000 in 20X3 and a deficit of ($100,000) in accumulated E&P at the beginning of the year. Aztec distributed $300,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?

A calendar-year corporation has deficit in current E&P of ($500) and accumulated positive E&P of $1,000. The corporation makes a $600 distribution to its sole shareholder. Which of the following statements is true?

Which of the following statements is true?

Au Sable Corporation reported taxable income of $800,000 in 20X3 and paid federal income taxes of $272,000. Not included in the computation was a disallowed penalty of $25,000, life insurance proceeds of $100,000, and a federal income tax refund from 20X2 of $50,000. Au Sable is an accrual-basis taxpayer. The corporation's current E&P for 20X3 would be:

Beltway Company is owned equally by George, his brother Thomas, and a partnership owned 50 percent by George and his father, Abe. Each of the three shareholders holds 100 shares in the company. Under the §318 stock attribution rules, how many shares of Beltway stock is George deemed to own?

Geneva Corporation, a privately held company, has one class of voting common stock, of which 1,000 shares are issued and outstanding. The shares are owned as follows: Madison has a 20 percent interest in the partnership. The remaining 80 percent is owned by unrelated individuals. Madison owns 40 percent of Packer Corporation. The other 60 percent is owned by her father. How many shares of stock is Madison deemed to own under the family attribution rules in a stock redemption?

Comet Company is owned equally by Pat and his sister Pam, each of whom hold 100 shares in the company. Comet redeems 50 of Pam's shares on December 31, 20X3, for $1,000 per share in a transaction that Pam treats as an exchange for tax purposes. Comet has total E&P of $160,000 on December 31, 20X3. What are the tax consequences to Comet because of the stock redemption?

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.