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Exam 7: Corporate Taxation: Non-Liquidating Distributions

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Question 31

True/False

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Big-gain Corporation distributes land with a fair market value of $220,000 to its sole shareholder. Big-gain's tax basis in the land is $115,000. Big-gain will not be taxed on a gain on the distribution if it has a deficit of ($250,000) in E&P.

A) True
B) False

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Question 32

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Which of the following forms of earnings distributions would not be subject to double taxation at the corporate and shareholder level?

A) Dividend
B) Stock redemption
C) Partial liquidation
D) Compensation paid to a shareholder/employee of the corporation.

E) C) and D)
F) None of the above

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Question 33

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Cedar Corporation incurs a net capital loss of $20,000 in 20X3 that is carried forward to 20X4. However, Cedar will deduct the net capital loss in the computation of current E&P for 20X3.

The term "E&P" iswell defined in the Internal Revenue Code.

A calendar-year corporation has positive current E&P of $500 and a deficit in accumulated E&P of ($1,200) . The corporation makes a $400 distribution to its sole shareholder. Which of the following statements is true?

Husker Corporation reportsa deficit in current E&P of ($200,000) in 20X3 and accumulated E&P at the beginning of the year of $300,000. Husker distributed $200,000 to its sole shareholder on December 31, 20X3. The shareholder's tax basis in her stock in Husker is $50,000. How is the distribution treated by the shareholder in 20X3?

Tappan declared a 100 percent stock distribution to all shareholders of record on May 2 of this year. Prior to the distribution, Tappan reported current E&P of $60,000 and accumulated E&P of $30,000. Prior to the split, Barb owned 100 shares of Tappan stock, with a market value of $150 per share and a tax basis of $100 per share. After the distribution, Barb owned 200 shares of Tappan, with a market value of $80 per share. What is the per-share tax basis of Barb's additional 100 shares?

Orchard, Incorporated reported taxable income of $800,000 in 20X3 and paid federal income taxes of $272,000. Included in the company's computation of taxable income is gain from sale of a depreciable asset of $200,000. The income tax basis of the asset was $50,000. The E&P basis of the asset using the alternative depreciation system was $75,000. Compute the company's current E&P for 20X3.

Which of the following statements best describes the role of current and accumulated E&P in determining if a distribution is a dividend?

Battle Corporation redeems 20 percent of its stock for $100,000 in a stock redemption that is treated as an exchange by the shareholders. Battle's E&P at the date of the redemption is $200,000. Battle must reduce its E&P by $100,000 because of the redemption.

Which of the following statements best describes current E&P?

Greenwich Corporation reported a net operating loss of $800,000 in 20X3, which the corporation elected to carry forward to 20X4. The computation of the loss did not include a disallowed fine of $50,000, life insurance proceeds of $500,000, and a current-year charitable contribution of $10,000 that will be carried forward to 20X4. The corporation's current E&P for 20X3 would be:

Which of the following stock distributions would be tax-free to the shareholder?

Beltway Company is owned equally by George, his brother Thomas, and a partnership owned 50 percent by George and his father, Abe. Each of the three shareholders holds 100 shares in the company. Under the §318 stock attribution rules, how many shares of Beltway stock is George deemed to own?

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

Montclair 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, Molly Pitcher. The land's fair market value was $200,000 and its tax and E&P basis to Montclair was $50,000. Molly assumed a liability of $25,000 attached to the land. The tax consequences of the distribution to Montclair in 20X3 would be:

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 230 shares in the company. Under the §318 stock attribution rules, how many shares of Lansing stock is DeWitt Corporation deemed to own?

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 350 shares of El Toro stock, with a tax basis of $81 per share. The fair market value of the El Toro stock was $121 per share on June 30, 20X3. What are the tax consequences of the stock distribution to Raoul?

Catamount Company 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, 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 20X3 would be:

The "family attribution" rules are automatically waived in a complete redemption of a shareholder's stock.