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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 21

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As of January 1, Cassowary Corporation has a deficit in accumulated E & P of $100,000.For the tax year, current E & P (accrued ratably) is $240,000 (prior to any distributions) .On July 1, Cassowary Corporation distributes $275,000 to its sole shareholder.The amount of the distribution that is a dividend is:

A) $20,000.
B) $140,000.
C) $240,000.
D) $275,000.
E) None of the above.

F) None of the above
G) All of the above

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Question 22

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

A) When the basis of distributed property is greater than its fair market value, a deficit may be created in E & P.
B) When the basis of distributed property is less than its fair market value, the distributing corporation recognizes gain.
C) When the basis of distributed property is greater than its fair market value, the distributing corporation does not recognize loss.
D) The amount of a distribution received by a shareholder is measured by using the property's fair market value.
E) All of the above statements are true.

F) None of the above
G) B) and D)

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Question 23

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Renee, the sole shareholder of Indigo Corporation, sold her stock to Chad on July 1 for $180,000.Renee's stock basis at the beginning of the year was $120,000.Indigo made a $60,000 cash distribution to Renee immediately before the sale, while Chad received a $120,000 cash distribution from Indigo on November 1.As of the beginning of the current year, Indigo had $26,000 in accumulated E & P, while current E & P (before distributions) was $90,000.Which of the following statements is correct?

In the current year, Carnation Corporation has a § 179 expense of $40,000.As a result, in the current year, taxable income must be increased by $32,000 to determine current E & P.

Which of the following is an incorrect statement regarding the application of the § 318 stock attribution rules?

Distributions that are not dividends are a return of capital and decrease the shareholder's basis.Once basis is reduced to zero, any excess is taxed as a capital gain.

Sam's gross estate includes stock in Tern Corporation and Wren Corporation, valued at $1.4 million and $980,000, respectively.At the time of Sam's death in 2012, the stock represented 22% of Tern's outstanding stock and 27% of Wren's outstanding stock.Sam's adjusted gross estate equals $6,500,000.Death taxes and funeral and administration expenses for Sam's estate total $980,000.Sam had a basis of $350,000 in the Tern stock and $190,000 in the Wren stock at the time of his death.None of the beneficiaries of Sam's estate own (directly or indirectly) any stock in Tern Corporation, but some of the beneficiaries own stock of Wren Corporation.Consider the following independent questions.

The adjusted gross estate of Debra, decedent, is $8 million.Debra's estate will incur death taxes and funeral and administration expenses of $1 million.Debra's gross estate includes stock in Silver Corporation that she had purchased twelve years ago for $600,000 (date of death fair market value of $3 million) .At the time of her death in 2012, Debra owned 80% of the stock in Silver Corporation.Silver Corporation (E & P of $4 million) redeems all of the estate's stock in the corporation for $3 million.Debra's will names her daughter, Dena, who owns the remaining 20% interest in Silver Corporation, as her sole heir.With respect to this redemption, Debra's estate has the following income:

Tungsten Corporation, a calendar year cash basis taxpayer, made estimated tax payments of $800 each quarter in 2012, for a total of $3,200.Tungsten filed its 2012 tax return in 2013 and the return showed a tax liability $4,200.At the time of filing, March 15, 2013, Tungsten paid an additional $1,000 in Federal income taxes.How does the additional payment of $1,000 impact Tungsten's E & P?

The gross estate of John, decedent, includes stock in Crimson Corporation and Jade Corporation valued at $1.3 million and $2 million, respectively. John's adjusted gross estate is $9 million. He owned 23% of the Crimson stock and 31% of the Jade stock. Immediate members of John's family own the remaining shares of both Crimson and Jade. Those individuals are also the sole beneficiaries of John's estate. Death taxes and funeral and administration expenses for John's estate are $1.3 million. John had a basis of $475,000 in the Crimson stock and $510,000 in the Jade stock. Crimson Corporation (E & P of $3 million) distributed land worth $1.3 million (basis of $800,000) to John's estate in redemption of all of the Crimson stock. Which of the following is a correct statement regarding the tax consequences of this redemption?

Maria and Christopher each own 50% of Cockatoo Corporation, a calendar year taxpayer.Distributions from Cockatoo are: $750,000 to Maria on April 1 and $250,000 to Christopher on May 1.Cockatoo's current E & P is $300,000 and its accumulated E & P is $600,000. How much of the accumulated E & P is allocated to Christopher's distribution?

Hawk Corporation has 2,000 shares of stock outstanding: Marina owns 700 shares, Russell owns 600 shares, Velvet Partnership owns 300 shares, and Yellow Corporation owns 400 shares. Marina and Russell, unrelated individuals, are equal partners of Velvet Partnership. Marina owns 25% of the stock in Yellow Corporation.

Stacey and Andrew each own one-half of the stock in Parakeet Corporation, a calendar year taxpayer. Cash distributions from Parakeet are: $350,000 to Stacey on April 1 and $150,000 to Andrew on May 1. If Parakeet's current E & P is $60,000, how much is allocated to Andrew's distribution?

When computing current E & P, taxable income is not adjusted for the deferred gain in a § 1031 like-kind exchange.

Distributions by a corporation to its shareholders are presumed to be a dividend unless the parties can prove otherwise.

On January 1, Gull Corporation (a calendar year taxpayer) has accumulated E & P of $200,000.During the year, Gull incurs a net loss of $280,000 from operations that accrues ratably.On June 30, Gull distributes $120,000 to Sharon, its sole shareholder, who has a basis in her stock of $75,000.How much of the $120,000 is a dividend to Sharon?

Duck Corporation is a calendar year taxpayer formed in 2006.Duck's E & P for each of the past 5 years is listed below. Duck Corporation made the following distributions in the previous 5 years. Duck's accumulated E & P as of January 1, 2012 is:

Starling Corporation has accumulated E & P of $60,000 on January 1, 2012.In 2012, Starling Corporation had an operating loss of $80,000.It distributed cash of $40,000 to Zoe, its sole shareholder, on December 31, 2012.Starling Corporation's balance in its E & P account as of January 1, 2013, is:

Which one of the following statements is false?

Constructive dividends do not need to satisfy the legal requirements for a dividend as set forth by applicable state law.