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Exam 7: Corporate Taxation: Non-Liquidating Distributions

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Question 51

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Abbot Corporation reported a net operating loss of $500,000 in 20X3, which the corporation elected to carry forward to 20X4. Included in the computation of the taxable loss was regular depreciation of $200,000 (E&P depreciation is $35,000) , first-year expensing under §179 of $60,000, and a dividends received deduction of $11,000. The corporation's current E&P for 20X3 would be:

A) ($324,000) .
B) ($276,000) .
C) ($500,000) .
D) ($595,000) .

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

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Question 52

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Longhorn Company reports current E&P of $115,000 in 20X3 and a deficit of ($230,000) in accumulated E&P at the beginning of the year. Longhorn distributed $345,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in his stock in Longhorn is $115,000. How is the distribution treated by the shareholder in 20X3?

A) $345,000 dividend
B) $115,000 dividend, $115,000 tax-free return of basis, and $115,000 capital gain
C) $115,000 dividend and $230,000 tax-free return of basis
D) $0 dividend, $115,000 tax-free return of basis, and $230,000 capital gain

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

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Question 53

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Walloon, Incorporated reported taxable income of $1,000,000 in 20X3 and paid federal income taxes of $210,000. The company reported a capital gain from sale of investments of $150,000, which was partially offset by a $40,000 net capital loss carryover from 20X2, resulting in a net capital gain of $110,000 included in taxable income. Compute the company's current E&P for 20X3.

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:

Diego owns 30 percent of Azul Corporation. Azul Corporation owns 50 percent of Verde Corporation. Under the attribution rules applying to stock redemptions, Diego is treated as owning 15 percent of Verde Corporation.

Lansing Company is owned equally by Jennifer, her husband, Dan, and DeWitt Corporation, which is owned 50 percent by Jennifer and her sister Jane. Each of the three shareholders holds 100 shares in the company. Under the §318 stock attribution rules, how many shares of Lansing stock is DeWitt Corporation deemed to own?

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 utilized in 20X3, and gain of $50,000 recognized on the collection of cash from an installment sale that took place in 20X1. The corporation's current E&P for 20X3 would be:

Green Corporation has a deficitin current E&P of ($100,000) and positive accumulated E&P of $250,000. A $50,000 distribution from Green to its sole shareholder at year-end will be treated as a dividend.

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

General Inertia Corporation made a pro rata distribution of $50,000 to Tiara, Incorporated in partial liquidation of the company on December 31, 20X3. Tiara, Incorporated owns 500 shares (50 percent) of General Inertia. The distribution was in exchange for 250 shares of Tiara's stock in the company. After the partial liquidation, Tiara continued to own 50percent of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Tiara'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 amount of dividend or capital gain does Tiara recognize because of the transaction?

Comet Company is owned equally by Pat and his sister Pam, each of whom holds 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, 20X3. 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 because of the stock redemption?

Catamount Company had current and accumulated E&P of $505,000 at December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Caroline West. The land's fair market value was $205,000 and its tax and E&P basis to Catamount was $252,500. The tax consequences of the distribution to Catamount in 20X3 would be:

Only taxable income and deductible expenses are included in the computation of current E&P.

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?

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?

This year Truckit reported taxable income of $160,000 and received $20,000 of municipal interest. Truckit paid $55,000 in entertainment expenses and $15,000 in fines and penalties. Truckit had $50,000 of accumulated E&P at the beginning of the year. What is Truckit's current E&P?

A corporation's "E&P" account is equal to the company's "retained earnings" account on itsfinancial balance sheet.

Townsend Corporation declared a 1-for-1 stock split to all common stock shareholders of record on December 31, 20X3. Townsend reported current E&P of $400,000 and accumulated E&P of $1,000,000. The total fair market value of the stock distributed was $500,000. Regina Williams owned 1,000 shares of Townsend common stock, with a tax basis of $200 per share ($200,000 total). The fair market value of the common stock was $300 per share on December 31, 20X3. What is Regina's income tax basis per share in the new and existing common stock she owns in Townsend, assuming the distribution is tax-free?

Sam owns 55 percent of the stock of Club Corporation. Unrelated individuals own the remaining 45 percent. For a stock redemption of Sam's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Club stock must Sam own after the redemption?

Austin Company reports positive current E&P of $200,000 and a deficit in accumulated E&P of ($300,000). Austin distributed $250,000 to its sole shareholder, Betsy Bevo, on December 31, 20X3. 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?