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Exam 14: Corporate Nonliquidating and Liquidating Distributions

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Question 51

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A calendar-year corporation has negative 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?

A) $500 of the distribution will be a dividend because total earnings and profits is $500.
B) $0 of the distribution will be a dividend because current earnings and profits is negative.
C) $600 of the distribution will be a dividend because accumulated earnings and profits is $1,000.
D) Up to $600 of the distribution could be a dividend depending on the balance in accumulated earnings and profits on the date of the distribution.

E) A) and B)
F) B) and D)

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Question 52

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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?

A) 100
B) 200
C) 300
D) 400

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

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Question 53

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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, year 1. Henry owns 500 shares (50%) 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% 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 as a result of the transaction?

Viking Corporation is owned equally by Sven and his wife Olga, each of whom hold 100 shares in the company. Viking redeemed 75 shares of Sven's stock for $2,000 per share on December 31, year 1. Viking has total E&P of $500,000. What are the tax consequences to Viking as a result of the stock redemption?

A liquidating corporation always recognizes gain realized in a complete liquidation.

Mike and Michelle decided to liquidate their jointly owned corporation, Pennsylvania Corporation. After liquidating its remaining inventory and paying off its remaining liabilities, Pennsylvania had the following tax accounting balance sheet. $\begin{array}{|l|r|}\hline \text { Taxable income from operations } & \$ 500,000 \\\hline \text { Loss on distribution of land }(\$ 100,000-\$ 125,000) \text { is disallowed } & 0 \\\hline \text { Total taxable inc ome } & \$ 500,000 \\\hline \text { Federal income tax (\$500,000×34\%)}& (170,000)\\\hline \text { Taxable income } & \$ 500,000 \\\hline \text { Subtract: } & \\\hline \text { Federal income tax } & (170,000) \\\hline \text { Current E \&P } & \$ 330,000 \\\hline \text { Subtract: } & \\\hline \text { E\&P basis of land distributed } & (125,000) \\\hline \text { Add: } & \\\hline \text { Mortgage ass umed by Marcus } & 25,000 \\\hline \text { Current E \&P after distribution } & \$ 230,000 \\\hline \text { Accumulated E\&P, beginning of year } 1 & 850,000 \\\hline \text { Accumulated E\&P, beginning of year } 2 & \$ 1,080,000 \\\hline\end{array}$ Under the terms of the agreement, Mike will receive the $200,000 cash in exchange for his 40 percent interest in Pennsylvania. Mike's tax basis in his Pennsylvania stock is $50,000. Michelle will receive the building and land in exchange for her 60 percent interest in Pennsylvania. Her tax basis in the Pennsylvania stock is $100,000. What amount of gain or loss does Michelle recognize in the complete liquidation and what is her tax basis in the building and land after the complete liquidation?

Catamount Company had current and accumulated E&P of $500,000 at December 31, year 1. On December 31, the company made a distribution of land to its sole shareholder, Caroline West. The land's fair market value was $200,000 and its tax and E&P basis to Catamount was $250,000. The tax consequences of the distribution to Catamount in year 1 would be:

Which of the following statements best describes the recognition of loss on property transferred to shareholders in complete liquidation of a corporation?

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, year 1, 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 year 1, by what amount does the company reduce its E&P as a result of the redemption?

Stock distributions are always tax-free to the recipient.

Comet Company is owned equally by Pat and his sister Pam, each of whom hold 100 shares in the company. Pam wants to reduce her ownership in the company, and it was decided that the company will redeem 50 of her shares for $1,000 per share on December 31, year 1. Pam's income tax basis in each share is $500. Comet has total E&P of $250,000. What are the tax consequences to Pam as a result of the stock redemption?

Which of the following statements best describes the role of current and accumulated earnings and profits in determining if a distribution is a dividend?

Abbot Corporation reported a net operating loss of $400,000 in year 1, which the corporation elected to carryforward to year 2. Included in the computation was regular depreciation of $100,000 (E&P depreciation is $40,000) , and a dividends received deduction of $15,000. The corporation's current earnings and profits for year 1would be:

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

Mike and Michelle decided to liquidate their jointly owned corporation, Pennsylvania Corporation. After liquidating its remaining inventory and paying off its remaining liabilities, Pennsylvania had the following tax accounting balance sheet. $\begin{array} { | l | r | } \hline \text { Taxable income from operations } & \$ 400,000 \\\hline \text { Gain on distribution of land } ( \$ 50,000 - \$ 30,000 ) & 20,000 \\\hline \text { Total taxable inc ome } & \$ 420,000 \\\hline \text { Federal inc ome tax } ( \$ 420,000 \times 34 \% ) € & ( 142,800 ) \\\hline \text { Taxable income } & \$ 420,000 \\\hline \text { Subtract: } & \\\hline \text { Federal income tax } &( 142,800 ) \\\hline \text { Adjustment for E\&P gain on distribution of land } & ( 0 ) \\\hline \text { Current E \&P } & \$ 277,200\end{array}$ Under the terms of the agreement, Mike will receive the $200,000 cash in exchange for his 40 percent interest in Pennsylvania. Mike's tax basis in his Pennsylvania stock is $50,000. Michelle will receive the building and land in exchange for her 60 percent interest in Pennsylvania. Her tax basis in the Pennsylvania stock is $100,000. What amount of gain or loss does Mike recognize in the complete liquidation?

Austin Company reports positive current E&P of $200,000 and negative accumulated E&P of $300,000. Austin distributed $250,000 to its sole shareholder, Betsy Bevo, on December 31, year 1. Betsy's tax basis in her stock is $125,000. How much of the $250,000 distribution is treated as a dividend to Betsy and what is her tax basis in Austin stock after the distribution?

Au Sable Corporation reported taxable income of $800,000 in year 2 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 an income tax refund from year 1 of $50,000. Au Sable is an accrual basis taxpayer. The corporation's current earnings and profits for year 2 would be:

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.

Billie transferred her 20 percent interest to Jean Company as part of a complete liquidation of the company. In the exchange she received land with a fair market value of $200,000. Billie's basis in the Jean stock was $100,000. The land had a basis to Jean Company of $400,000. What amount of loss does Jean recognize in the exchange and what is Billie's basis in the land she receives? Billie is not considered a related party to Jean Company.

Packard Corporation reported taxable income of $1,000,000 in year 3 and paid federal income taxes of $340,000. Included in the computation was a dividends received deduction of $5,000, a net capital loss carryover from year 2 of $10,000, and gain of $50,000 from an installment sale that took place in year 1. The corporation's current earnings and profits for year 3 would be: