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Exam 7: Corporate Taxation: Nonliquidating Distributions

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Question 41

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Yellowstone Corporation made a distribution of $300,000 to Cheney,Inc.in partial liquidation of the company on December 31,20X3.Cheney,Inc.owns 50 percent of Yellowstone Corporation (1,000 shares).The other 50 percent is owned by an unrelated corporation.The distribution was in exchange for 50% of Cheney's stock in the company (500 shares).At the time of the distribution,the shares had a fair market value of $800 per share.Cheney's income tax basis in the shares was $500 per share.Yellowstone had total E&P of $5,000,000 at the time of the distribution.What is the amount and character (capital gain or dividend)of any income or gain recognized by Cheney as a result of the partial liquidation?

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$300,000 dividend
A corporation receives...

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Question 42

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Husker Corporation reports current E&P of negative $200,000 in 20X3 and accumulated E&P at the beginning of the year of $300,000.Husker distributed $200,000 to its sole shareholder on December 31,20X3.The shareholder's tax basis in her stock in Husker is $50,000.How is the distribution treated by the shareholder in 20X3?

A) $200,000 dividend.
B) $100,000 dividend, $50,000 tax-free return of basis, and $50,000 capital gain.
C) $100,000 dividend and $100,000 tax-free return of basis.
D) $0 dividend, $50,000 tax-free return of basis, and $150,000 capital gain.

E) All of the above
F) None of the above

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Question 43

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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 "double taxation" of corporate income refers to the taxation of corporate income at both the entity-level and the shareholder-level.

Evergreen Corporation distributes land with a fair market value of $200,000 to its sole shareholder.Evergreen's tax basis in the land is $50,000.Evergreen will report a gain of $150,000 on the distribution regardless of whether its earnings and profits are positive or negative.

Wonder Corporation declared a common stock dividend 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 $180.00 per share on September 30,20X3.What are the tax consequences of the stock dividend to Diana?

Longhorn Company reports current E&P of $100,000 in 20X3 and accumulated E&P at the beginning of the year of negative $200,000.Longhorn distributed $300,000 to its sole shareholder on January 1,20X3.The shareholder's tax basis in his stock in Longhorn is $100,000.How is the distribution treated by the shareholder in 20X3?

Pine Creek Company is owned equally by Bob and his sister Samantha,each of whom own 1,000 shares in the company.On December 31,20X3,Pine Creek redeemed 200 of Samantha's shares for $5,000,000 in a transaction treated as an exchange by Samantha.Pine Creek has current E&P of $10,000,000 and accumulated E&P of $30,000,000 (computed without regard to the stock redemption).Assuming Pine Creek did not make any dividend distributions during 20X3,by what amount does the company reduce its E&P because of the redemption?

Sunapee Corporation reported taxable income of $700,000 from operations for 20X3.During the year,the company made a distribution of land to its sole shareholder,Jean McCarthy.The land's fair market value was $125,000 and its tax and E&P basis to Sunapee was $75,000.Jean assumed a mortgage attached to the land of $25,000.Sunapee's tax rate is 34%.Compute Sunapee's total taxable income and federal income tax paid because of the distribution.Using your solution,compute Sunapee's current E&P for 20X3.

Panda Company is owned equally by Min,her husband Bin,her sister Xiao,and her grandson,Han,each of whom hold 100 shares in the company.Under the family attribution rules,how many shares of Panda stock is Min deemed to own?

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 earnings and profits for 20X3 would be:

Goose Company is owned equally by Val and her sister Eugenia,each of whom own 500 shares in the company.Val wants to reduce her ownership in the company and have the transaction treated as an exchange for tax purposes.Determine the minimum amount of stock that Goose must redeem from Val for her to treat the redemption as being "substantially disproportionate with respect to the shareholder" and receive exchange treatment.

Which of these items is not an adjustment to taxable income or net loss to compute current E&P?

Which of the following statements best describes the priority of the tax treatment of a distribution from a corporation to a shareholder?

A distribution from a corporation to a shareholder will only be treated as a dividend for tax purposes if the distribution is paid out of current or accumulated earnings and profits.

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 34%.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.

Bruin Company reports current E&P of $200,000 in 20X3 and accumulated E&P at the beginning of the year of $100,000.Bruin distributed $400,000 to its sole shareholder on January 1,20X3.How much of the distribution is treated as a dividend in 20X3?

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

Otter Corporation reported taxable income of $400,000 from operations for 20X3.The company paid federal income taxes of $136,000 on this taxable income.During the year,the company made a distribution of land to its sole shareholder,Emmet Jugg.The land's fair market value was $50,000 and its tax and E&P basis to Otter was $30,000.Emmet assumed a mortgage attached to the land of $10,000.Any gain from the distribution will be taxed at 34%.The company had accumulated E&P of $900,000 at the beginning of the year.Compute Otter's total taxable income and federal income tax paid because of the distribution (assume a tax rate of 34%).Using your solution,compute Otter's current E&P for 20X3.

Sherburne Corporation reported current earnings and profits for 20X3 of $500,000.During the year,the company made a distribution of land to its sole shareholder,Ted Bozeman.The land's fair market value was $150,000 and its tax and E&P basis to Sherburne was $100,000.Ted assumed a mortgage attached to the land of $25,000.What amount of dividend income does Ted report because of the distribution and what is Ted's income tax basis in the land received from Sherburne?