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Exam 13: Corporations: Earnings and Profits and Distributions

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Question 1

Multiple Choice

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The tax treatment of corporate distributions at the shareholder level does not depend on:

A) The character of the property being distributed.
B) The earnings and profits of the corporation.
C) The basis of stock in the hands of the shareholder.
D) Whether the distributed property is received by an individual or a corporation.
E) None of these.

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A

Question 2

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Tern Corporation, a cash basis taxpayer, has taxable income of $500,000 for the current year.Tern elected $25,000 of § 179 expense.It also had a related-party loss of $20,000 and a realized (not recognized) gain from an involuntary conversion of $75,000.It paid Federal income tax of $150,000 and paid a nondeductible fine of $10,000.Tern's current E & P is:

A) $415,000.
B) $350,000.
C) $340,000.
D) $320,000.
E) None of these.

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Question 3

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When current E & P is positive and accumulated E & P has a deficit balance, the two accounts are netted for dividend determination purposes.

Falcon Corporation ended its first year of operations with taxable income of $250,000.At the time of Falcon's formation, it incurred $50,000 of organizational expenses.In calculating its taxable income for the year, Falcon claimed an $8,000 deduction for the organizational expenses.What is Falcon's current E & P?

Jen, the sole shareholder of Mahogany Corporation, sold her stock to Jason on July 1 for $90,000.Jen's stock basis at the beginning of the year was $60,000.Mahogany made a $30,000 cash distribution to Jen immediately before the sale, and Jason received a $60,000 cash distribution from Mahogany on November 1.As of the beginning of the current year, Mahogany had $16,000 in accumulated E & P, and current E & P (before distributions) is $30,000.What are the tax consequences of these transactions to Jen and Jason?

Albatross Corporation acquired land for investment purposes in 2004 at a cost of $100,000.Albatross sold the land to Monty on December 30, 2019, and did not elect out of the installment method of accounting.The selling price of the property was $400,000.Monty made a cash down payment of $50,000 on the date of sale and executed a $350,000 note, payable in seven annual installments of $50,000 each plus interest at the rate of 6% per annum.The first installment of $50,000 was due in 2020 which Monty paid, plus interest of $21,000.Discuss the effect of this sale on Albatross's taxable income and its E & P account in 2019 and 2020.

Purple Corporation has accumulated E & P of $100,000 on January 1, 2019.In 2019, Purple has current E & P of $130,000 (before any distribution) .On December 31, 2019, the corporation distributes $250,000 to its sole shareholder, Cindy (an individual) .Purple Corporation's E & P as of January 1, 2020 is:

No E & P adjustment is required for regular tax gains under the installment method.

A realized gain from an involuntary conversion under § 1033 that is not recognized for income tax purposes has no effect on E & P.

Using the legend provided, classify each statement accordingly. In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2019. a. Increase b. Decrease c. No effect -A decrease in the LIFO recapture amount during the year.

Tangelo Corporation has an August 31 year-end.Tangelo had $50,000 in accumulated E & P at the beginning of its 2020 fiscal year (September 1, 2019) and during the year, it incurred a $75,000 operating loss.It also distributed $65,000 to its sole shareholder, Cass, on November 30, 2019.If Cass is a calendar year taxpayer, how should she treat the distribution when she files her 2019 income tax return (assuming the return is filed by April 15, 2020) ?

Pebble Corporation, an accrual basis taxpayer, has struggled to survive since its formation six years ago.As a result, it has a deficit in accumulated E & P of $340,000 at the beginning of the year.This year, however, Pebble earned a significant profit; taxable income was $240,000.Consequently, Pebble made two cash distributions to Martha, its sole shareholder: $150,000 on July 1 and $200,000 December 31.The following information might be relevant to determining the tax treatment of the distributions. ∙ This year's taxable income included a net operating loss carryover of $50,000. ∙ The corporation's Federal income tax liability is $50,400 for the year. ∙ Pebble paid nondeductible fines and kickbacks of $10,000.The company also paid nondeductible life insurance premiums of $22,000. ∙ The cash surrender value of the corporate-owned life insurance policies increased by $11,000 during the year. ∙ The company sold a piece of equipment during the year and reported a § 1231 gain of $105,000 and recapture income under § 1245 of $35,000.There were no other § 1231 transactions during the year, but the corporation did have a capital loss carryforward of $30,000. ∙ MACRS depreciation exceeds E & P depreciation by $14,000.In addition, an election under § 179 was made this year for $18,000 of assets. a.Compute Pebble's E & P for the year. b.What are the tax consequences of the two distributions made during the year to Martha (her stock basis is $64,000)?

An increase in the LIFO recapture amount must be added to taxable income to determine E & P.

Brown Corporation, an accrual basis corporation, has taxable income of $150,000 in the current year.Included in its determination of taxable income are the following transactions. ∙ Brown incurred a $65,000 capital loss from the sale of stock.Because Brown had no capital gains this year, none of the loss is deductible. ∙ The corporation's Federal income tax liability is $31,500. ∙ Brown incurred $18,000 in nondeductible meal expenses. ∙ Brown uses the LIFO method when accounting for inventory.This year, the company's LIFO recapture amount increased by $3,000. ∙ Brown claimed a dividends received deduction of $1,500.What is Brown's current E & P for the year?

On January 1, Tulip Corporation (a calendar year taxpayer) has accumulated E & P of $300,000.Its current E & P for the year is $90,000 (before considering dividend distributions).During the year, Tulip distributes $600,000 ($300,000 each) to its equal shareholders, Anne and Tom.Anne has a basis in her stock of $65,000, and Tom's basis is $120,000.What is the effect of the distribution by Tulip Corporation on Anne and Tom?

Which one of the following statements about property distributions is false?

The dividends received deduction has no impact on E & P.

Regardless of any deficit in current E & P, distributions during the year are taxed as dividends to the extent of accumulated E & P.

A corporation that distributes a property dividend must reduce its E & P by the adjusted basis of the property less any liability on the property.

Matching Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2019. a. Increase b. Decrease c. No effect -Premiums paid on key employee life insurance policy (assume no increase in cash surrender value of policy) in 2019.