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Exam 18: Corporate Taxation: Nonliquidating Distributions

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Question 41

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Which of the following individuals is not considered "family" for purposes of applying the stock attribution rules to a stock redemption?

A) Parents
B) Grandchildren
C) Grandparents
D) Spouse

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

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Question 42

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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.

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Taxable income of $420,000, Fe...

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Question 43

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El Toro Corporation declared a common stock dividend to all shareholders of record on June 30, 20X3. Shareholders will receive 1 share of El Toro stock for each 2 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 dividend to Raoul?

Tammy owns 100 shares in Star Struck Corporation. The other 100 shares are owned by her husband Tommy. Which of the following statements is true?

Corona Company is owned equally by Maria, her sister Carlita, her mother Gabriella, and her grandmother Olivia, each of whom hold 100 shares in the company. Under the family attribution rules, how many shares of Corona stock is Maria deemed to own?

Beaver Company reports current E&P of $100,000 in 20X3 and accumulated E&P at the beginning of the year of $200,000. Beaver distributed $400,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in her stock in Beaver is $200,000. How is the distribution treated by the shareholder in 20X3?

A distribution in partial liquidation of a corporation is always treated as a sale or exchange by an individual shareholder.

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% 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?

Houghton Company reports negative current E&P of ($500,000) and negative accumulated E&P of ($800,000). Houghton distributed $100,000 to its sole shareholder, Blossom Applegate, on December 31, 20X3. Blossom's tax basis in her Houghton stock is $50,000. What is the tax treatment of the distribution to Blossom and what is her tax basis in Houghton stock after the distribution?

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 an installment sale of $25,000. The corporation's current earnings and profits for 20X3 would be:

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?

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

Packard Corporation reported taxable income of $1,000,000 in 20X3 and paid federal income taxes of $340,000. Included in the taxable income computation was a dividends received deduction of $5,000, a net capital loss carryover from 20X2 of $10,000, and gain of $50,000 from an installment sale that took place in 20X1. The corporation's current earnings and profits for 20X3 would be:

Which of the following statements best describes current earnings and profits?

A corporation's "earnings and profits" account is equal to the company's "retained earnings" account on its balance sheet.

Wildcat Corporation reports current E&P of negative $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?

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

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.

Tammy owns 60 percent of the stock of Huron Corporation. Unrelated individuals own the remaining 40 percent. For a stock redemption to be treated as an exchange under the "substantially disproportionate" rule, the redemption must reduce Tammy's stock ownership below 48 percent.

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.