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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 61

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Yellow Corporation has a deficit in accumulated E & P of $600,000 and has current E & P of $450,000.On July 1,Yellow distributes $500,000 to its sole shareholder,Eugene,who has a basis in his stock of $105,000.As a result of the distribution,Eugene has:

A) Dividend income of $450,000 and no adjustment to stock basis.
B) Dividend income of $105,000 and reduces his stock basis to zero.
C) Dividend income of $450,000 and reduces his stock basis to $55,000.
D) No dividend income,reduces his stock basis to zero,and has a capital gain of $500,000.
E) None of the above.

F) A) and D)
G) D) and E)

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Question 62

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Falcon Corporation has $200,000 of current E & P and a deficit in accumulated E & P of $90,000.If Swan pays a $300,000 distribution to its shareholders on July 1,how much dividend income do the shareholders report?

A) $0.
B) $10,000.
C) $110,000.
D) $200,000.
E) None of the above.

F) C) and D)
G) B) and C)

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Question 63

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

Pelican Corporation has E & P of $260,000.It distributes land with a fair market value of $80,000 (adjusted basis of $30,000) to its sole shareholder,Bernard.The land is subject to a liability of $45,000 that Bernard assumes.Bernard has a taxable dividend of:

Honeysuckle Corporation is wholly owned by Tabatha.Corporate employees and annual salaries include Tabatha ($300,000);Ryan,Tabatha's son ($80,000);Regina,Tabatha's daughter ($100,000);and Quincy ($120,000).The operation of Honeysuckle Corporation is shared about equally between Tabatha and Quincy (an unrelated party).Ryan and Regina are full-time college students at a university about 100 miles away.Honeysuckle Corporation has substantial E & P but has not distributed a dividend for the past three years.Discuss problems related to the salary arrangement for Honeysuckle Corporation.

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?

Blue Corporation,a cash basis taxpayer,has taxable income of $700,000 for the current year.Blue elected $80,000 of § 179 expense.It also had a related party loss of $30,000 and a realized (not recognized) gain from an involuntary conversion of $85,000.It paid Federal income tax of $185,000 and a nondeductible fine of $20,000.Blue's current E & P is:

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

Orange Corporation distributes property worth $300,000,basis of $340,000,to a shareholder in a distribution that is a qualifying stock redemption.The property is subject to a liability of $110,000,which the shareholder assumes.The basis of the property to the shareholder is:

When a corporation makes an installment sale,for E & P purposes the realized gain is recognized as payments are received.

Jacqueline owns stock in Dove Corporation (basis of $40,000) as an investment.Dove distributes property (fair market value of $150,000;basis of $75,000) to her during the year.Dove has current E & P of $10,000 and accumulated E & P of $40,000 and makes no other distributions during the year.What is Jacqueline's capital gain on the distribution?

Violet Corporation is the sole shareholder of Finch Corporation,which it hopes to sell within the next three years.The Finch stock (basis of $28 million)is currently worth $33 million,but Violet believes that it would be easier to find a buyer if it was worth less.To lower the value of its stock,Finch distributes $3 million cash to Violet (sufficient E & P exists to cover the distribution).At a later date,Violet sells Finch for $30 million.

Ali is in the 35% tax bracket.He acquired 1,000 shares of stock in Cardinal Corporation seven years ago for $100 a share.In the current year,Cardinal Corporation (E & P of $1 million)redeems all of his shares for $300,000.What are the tax consequences to Ali if:

Brown Corporation has 1,000 shares of common stock outstanding.Bob owns 200 of the shares,Bob's mother owns 200 shares,Bob's daughter owns 100 shares,and Bob's sister owns 150 shares.The remaining shares outstanding are owned by Black Corporation (150 shares)and Bluebird Partnership (200 shares).Bob owns 60% of the stock in Black Corporation.

Any loss in current E & P must be treated as occurring ratably during the year.

A constructive dividend must satisfy the legal requirements of a dividend as set forth by applicable state law.

Bluebird Corporation's 1,000 shares outstanding are owned as follows: Lucinda,350 shares;Carl (Lucinda's father),300 shares;and Nancy (Lucinda's sister),350 shares.During the current year,Bluebird (E & P of $800,000)redeemed 200 shares of Lucinda's stock for $50,000.If Lucinda had acquired the 200 shares five years ago for $10,000,she will have a long-term capital gain of $40,000 from the redemption.

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

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 treated as a return of capital.

Which of the following statements is incorrect with respect to determining current E & P?