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Exam 13: Corporations: Earnings Profits and Distributions

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Question 41

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Purple Corporation makes a property distribution to its sole shareholder,Paul.The property distributed is a house (fair market value of $189,000;basis of $154,000) that is subject to a $245,000 mortgage that Paul assumes.Before considering the consequences of the distribution,Purple's current E & P is $35,000 and its accumulated E & P is $140,000.Purple makes no other distributions during the current year.What is Purple's taxable gain on the distribution of the house?

A) $0
B) $21,000
C) $35,000
D) $91,000
E) None of the above

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Question 42

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Briefly describe the rationale for the reduced tax rate on dividends for individual taxpayers.

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The double tax on dividends creates a nu...

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Question 43

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At the beginning of the current year,Doug and Alfred each own 50% of Amaryllis Corporation (a calendar year taxpayer) .In July,Doug sold his stock to Kevin for $140,000.At the beginning of the year,Amaryllis Corporation had accumulated E & P of $240,000 and its current E & P is $280,000 (prior to any distributions) .Amaryllis distributed $300,000 on February 15 ($150,000 to Doug and $150,000 to Alfred) and distributed another $300,000 on November 1 ($150,000 to Kevin and $150,000 to Alfred) .Kevin has dividend income of:

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

Aaron and Michele,equal shareholders in Cavalier Corporation,receive $25,000 each in distributions on December 31 of the current year.During the current year,Cavalier sold an appreciated asset for $60,000 (basis of $15,000) .Payment for the sale of the asset will be made as follows: 50% next year and 50% in the following year,with interest payable at a rate of 6 percent.Before considering the effect of the asset sale,Cavalier's current year E & P is $40,000 and it has no accumulated E & P.How much of Aaron's distribution will be taxed as a dividend?

Goldfinch Corporation distributes stock rights to its shareholders.How is the basis of the stock rights received by Goldfinch's shareholders determined?

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

Briefly discuss the rules related to distributions of non-cash property.

On January 2,2015,Orange Corporation purchased equipment for $300,000 with an ADS recovery period of 10 years and a MACRS useful life of 7 years.Section 179 was not elected.MACRS depreciation properly claimed on the asset,including depreciation in the year of sale,totaled $79,605.The equipment was sold on July 1,2016,for $290,000.As a result of the sale,the adjustment to taxable income needed to arrive at current E & P is:

Sylvia owns 25% of Cormorant Corporation.Cormorant sells diamonds to retail jewelry businesses.While Cormorant has a deficit in accumulated E & P of $56,000 at the beginning of the year,its current E & P is $500,000.Since the company had a successful year,Cormorant pays a $36,000 distribution to each of the company's four shareholders on December 15.Three shareholders receive cash,but Cormorant distributes a diamond (adjusted basis of $40,000 and a fair market value of $36,000)to Sylvia in lieu of cash.Determine the effect of distributing the diamond on Cormorant's and on Sylvia's taxable income.What is Sylvia's basis in the diamond? Was the distribution good tax planning on the part of Cormorant? Why or why not?

A deficit in current E & P is treated as occurring ratably during the year,unless the taxpayer can show otherwise.

During the year,Blue Corporation distributes land to its sole shareholder.If the fair market value of the land is less than its adjusted basis,Blue will not be able to recognize a loss on the distribution.

Seven years ago,Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 2,000 shares of Blue Corporation in a transaction that qualified under § 351.The assets had a tax basis to her of $400,000 and a fair market value of $700,000 on the date of the transfer.In the current year,Blue Corporation (E & P of $1 million) redeems 600 shares from Eleanor for $260,000 in a transaction that qualifies for sale or exchange treatment.With respect to the redemption,Eleanor will have a:

Finch Corporation (E & P of $400,000)distributed machinery ($10,000 adjusted basis,$150,000 fair market value)to its sole shareholder,Kathleen.The property is subject to a $50,000 mortgage,which Kathleen assumed.How much dividend income does Kathleen recognize as a result of the distribution and what is her basis in the machinery?

Corporate distributions are presumed to be paid out of E & P and are treated as dividends unless the parties to the transaction can show otherwise.

During the current year,Hawk Corporation sold equipment for $600,000 (adjusted basis of $360,000) .The equipment was purchased a few years ago for $760,000 and $400,000 in MACRS deductions have been claimed.ADS depreciation would have been $300,000.As a result of the sale,the adjustment to taxable income needed to determine current E & P is:

Blue Corporation has a deficit in accumulated E & P of $300,000 and has current E & P of $225,000.On July 1,Blue distributes $250,000 to its sole shareholder,Sam,who has a basis in his stock of $52,500.As a result of the distribution,Sam has:

Nondeductible meal and entertainment expenses must be subtracted from taxable income to determine current E & P.

When current E & P has a deficit and accumulated E & P is positive,the two accounts are netted at the date of the distribution.If a positive balance results,the distribution is a dividend to the extent of the balance.

In a property distribution,the amount of dividend income recognized by a shareholder is always reduced by the amount of liability assumed by a shareholder.