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Exam 5: Corporations: Earnings Profits and Dividend Distributions

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Question 41

True/False

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Cash distributions received from a corporation with a deficit balance in accumulated E & P at the beginning of the year will not be taxed as dividend income.

A) True
B) False

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Question 42

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Rust Corporation has accumulated E & P of $30,000 on January 1,2010.In 2010,Rust Corporation had an operating loss of $40,000.It distributed cash of $20,000 to Andre,its sole shareholder,on December 31,2010.Rust Corporation's balance in its E & P account as of January 1,2011,is:

A) $30,000 deficit.
B) $10,000 deficit.
C) $0.
D) $30,000.
E) None of the above.

F) B) and C)
G) A) and E)

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Question 43

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Ten years ago,Connie purchased 4,000 shares in Platinum Corporation for $40,000.In the current year,Connie receives a nontaxable stock dividend of 40 shares of Platinum preferred.Values at the time of the dividend are: $8,000 for the preferred stock and $72,000 for the common.Based on this information,Connie's basis is:

Property distributed by a corporation as a dividend is subject to a liability in excess of its basis.For purposes of determining gain on the distribution,the basis of the property is treated as being not less than the amount of liability.

Pheasant Corporation ended its first year of operations with taxable income of $225,000.At the time of Pheasant's formation,it incurred $50,000 of organizational expenses.In calculating its taxable income for the year,Pheasant claimed an $8,000 deduction for the organizational expenses.What is Pheasant's current E & P?

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

On January 1,Cotton Candy Corporation (a calendar year taxpayer)has accumulated E & P of $400,000.Its current E & P for the year is $120,000 (before considering dividend distributions).During the year,Cotton Candy distributes $800,000 ($400,000 each)to its equal shareholders,Mary and Larry.Mary has a basis in her stock of $95,000,while Larry's basis is $160,000.What is the effect of the distribution by Cotton Candy Corporation on Mary and Larry?

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

If stock rights are taxable,the recipient has income to the extent of the fair market value of the rights.

Dividends taxed at a 15% rate are not considered investment income for purposes of the investment interest expense limitation.

Green Corporation has accumulated E & P of $50,000 on January 1,2010.In 2010,Green has current E & P of $65,000 (before any distribution) .On December 31,2010,the corporation distributes $125,000 to its sole shareholder,Maxwell (an individual) .Green Corporation's E & P as of January 1,2011 is:

Thistle Corporation declares a nontaxable dividend payable in rights to subscribe to common stock.One right and $25 entitle the holder to subscribe to one share of stock.One right is issued for each share of stock held.Annette,a shareholder,owns 200 shares of stock that she purchased five years ago for $3,000.At the date of distribution of the rights,the market values were $50 per share for the stock and $25 for a right.Annette received 200 rights.She exercises 160 rights and purchases 160 additional shares of stock.She sells the remaining 40 rights for $1,080.What are the tax consequences to Annette?

A pro rata distribution of nonconvertible preferred stock to common shareholders is not generally taxable.

If a distribution of stock rights is taxable and their fair market value is less than 15 percent of the value of the old stock,then either a zero basis or a portion of the old stock basis may be assigned to the rights,at the shareholder's option.

Rosie,the sole shareholder of Eagle Corporation,has a stock basis of $100,000 at the beginning of the year.On July 1,she sells all of her stock to Manuel for $500,000.On January 1,Eagle has accumulated E & P of $45,000 and during the year,current E & P of $80,000.Eagle makes the following cash distributions: $90,000 to Rosie on March 31 and $90,000 to Manuel on November 1.How are the distributions taxed to Rosie and Manuel? What is Rosie's recognized gain on the sale to Manuel?

Which of the following statements regarding constructive dividends is not correct?

At the beginning of the current year,Dan and Andy each own 50% of Swallow Corporation.In July,Dan sold his stock to Kim for $140,000.At the beginning of the year,Swallow Corporation had accumulated E & P of $240,000 and its current E & P is $280,000 (prior to any distributions) .Swallow distributed $300,000 on March 10 ($150,000 to Dan and $150,000 to Andy) and distributed another $300,000 on October 1 ($150,000 to Kim and $150,000 to Andy) .Kim has dividend income of:

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:

Use of MACRS cost recovery when computing taxable income requires an E & P adjustment.

The dividends received deduction is added back to taxable income to determine E & P.