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Exam 13: Corporations: Earnings and Profits and Distributions

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Question 41

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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?

A) $0
B) $20,000
C) $25,000
D) $42,500
E) None of the above

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

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Question 42

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If there is sufficient E & P, a distribution of nonconvertible preferred stock to common shareholders is taxable.

A) True
B) False

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Question 43

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Steve has a capital loss carryover in the current year of $30,000.He owns 3,000 shares of stock in Carmine Corporation, which he purchased six years ago for $20 per share.In the current year, Carmine Corporation E & P of $750,000) redeems all of his shares for $140,000.Steve is in the 32% tax bracket.What is his income tax liability with respect to the corporate distribution if: a.Steve will have a capital gain of $80,000 on the redemption [$140,000 amount realized) - $60,000 stock basis)].Steve can offset the $30,000 capital loss carryover against the $80,000 of capital gain.His income tax liability on the a.The redemption qualifies for sale or exchange treatment, and Steve has no other transactions in the current year involving capital assets? b.The redemption does not qualify for sale or exchange treatment?

The dividends received deduction has no impact on E & P.

Glenda is the sole shareholder of Condor Corporation.She sold her stock to Melissa on October 31 for $150,000.Glenda's basis in Condor stock was $50,000 at the start of the year.Condor distributed land to Glenda immediately before the sale.Condor's basis in the land was $20,000 fair market value of $25,000) .On December 31, Melissa received a $75,000 cash distribution from Condor.During the year, Condor has $20,000 of current E & P and its accumulated E & P balance on January 1 is $10,000.Which of the following statements is true?

On January 2, 2018, 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, 2019, for $290,000.As a result of the sale, the adjustment to taxable income needed to arrive at current E & P is:

Robin Corporation, a calendar year taxpayer, has a deficit in current E & P of $200,000 and a $580,000 positive balance in accumulated E & P.If Robin determines that a $700,000 distribution to its shareholders is appropriate at some point during the year, what is the maximum amount of the distribution that could potentially be treated as a dividend?

Meal expense not deducted in 2018 because of the 50% limitation.

Maria owns 75% and Christopher owns 25% of Cockatoo Corporation, a calendar year taxpayer.Cockatoo makes a $600,000 distribution to Maria on April 1 and a $200,000 distribution to Christopher on May 1.Cockatoo's current E & P is $120,000 and its accumulated E & P is $500,000.What are the tax implications of the distributions to Maria and Christopher?

On January 1, Eagle Corporation a calendar year taxpayer) has accumulated E & P of $300,000.During the year, Eagle incurs a net loss of $420,000 from operations that accrues ratably.On June 30, Eagle distributes $180,000 to Libby, its sole shareholder, who has a basis in her stock of $112,500.How much of the $180,000 is a dividend to Libby?

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?

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

Scarlet Corporation is an accrual basis, calendar year corporation.Scarlet distributes inventory basis of $20,000; fair market value of $40,000) to Frank, its shareholder.Assuming that Scarlet has $500,000 of current E & P, what is the impact of the distribution on Scarlet Corporation and on Frank?

A shareholder's basis in property acquired in a stock redemption is the property's fair market value as of the date of redemption.

Timothy owns 100% of Forsythia Corporation's stock.Corporate employees and annual salaries include Timothy $300,000); Richard, Timothy's son $80,000); Rita, Timothy's daughter $100,000); and Sandy $120,000).The operation of Forsythia Corporation is shared about equally between Timothy and Sandy an unrelated party).Richard and Rita are full-time college students at a university about 150 miles away.Forsythia Corporation has substantial E & P but has not distributed a dividend for the past five years.Discuss problems related to the salary arrangement for Forsythia Corporation.

At the beginning of the current year, Doug and Amelia 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 Amelia) and distributed another $300,000 on November 1 $150,000 to Kevin and $150,000 to Amelia) .Kevin has dividend income of:

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.

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:

In general, how are current and accumulated earnings and profits allocated to corporate distributions?

Interest received from municipal bonds in 2018.