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Exam 5: Corporations: Earnings and Profits and Dividend Distributions

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Question 31

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Tern Corporation, a cash basis taxpayer, has taxable income of $500,000 for the current year. Tern elected $25,000 of § 179 expense. It also had a related-party loss of $20,000 and a realized not recognized) gain from an involuntary conversion of $75,000. It paid Federal income tax of $150,000 and paid a nondeductible fine of $10,000. Tern's current E & P is:

A) $415,000.
B) $350,000.
C) $340,000.
D) $320,000.
E) None of these.

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

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Question 32

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

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1) Current E & P is applied first to dis...

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Question 33

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Starling Corporation has accumulated E & P of $60,000 on January 1, 2019. In 2019, Starling Corporation had an operating loss of $80,000. It distributed cash of $40,000 to Zoe, its sole shareholder, on December 31, 2019. Starling Corporation's balance in its E & P account as of January 1, 2020, is:

Puffin Corporation makes a property distribution to its sole shareholder, Bonnie. The property distributed is a car basis of $30,000; fair market value of $20,000) that is subject to a $6,000 liability, which Bonnie assumes. Puffin has no accumulated E & P and $30,000 of current E & P from other sources during the year. What is Puffin's E & P after taking into account the distribution of the car?

Sylvia owns 25% of Cormorant Corporation, which sells diamonds to retail jewelry businesses. While Cormorant has a deficit in accumulated E & P of $56,000 at the beginning of the year, its current E & P is $500,000. Since the company had a successful year, Cormorant pays a $36,000 distribution to each of the company's four shareholders on December 15. Three shareholders receive cash, but Cormorant distributes a diamond adjusted basis of $40,000 and a fair market value of $36,000) to Sylvia in lieu of cash. Determine the effect of distributing the diamond on Cormorant's and on Sylvia's taxable income. What is Sylvia's basis in the diamond? Was the distribution good tax planning on the part of Cormorant? Why or why not?

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

Dividends paid to shareholders who hold both long and short positions do not qualify for the reduced tax rate available to individuals in certain years.

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.

Navy Corporation has E & P of $240,000. It distributes land with a fair market value of $70,000 adjusted basis of $25,000) to its sole shareholder, Troy. The land is subject to a liability of $55,000 that Troy assumes. Troy has:

Rose Corporation a calendar year taxpayer) has taxable income of $300,000, and its financial records reflect the following for the year. $\begin{array}{lr}\text { Federal income taxes paid } & \$ 110,000 \\\text { Net operating loss carryforward deducted currently } & 70,000 \\\text { Gain recognized this year on an installment sale from a prior year } & 44,000 \\\text { Depreciation deducted on tax return (ADS depreciation would have been } \$ 10,000) & 40,000 \\\text { Interest income on Iowa state bonds } & 8,000\end{array}$ Rose Corporation’s current E & P is:

If a stock dividend is taxable, the shareholder's basis in the newly received shares is equal to the fair market value of the shares received in the distribution.

When current E & P is positive and accumulated E & P has a deficit balance, the two accounts are netted for dividend determination purposes.

A realized gain from an involuntary conversion under § 1033 that is not recognized for income tax purposes has no effect on E & P.

Using the legend provided, classify each statement accordingly. In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2019. -Charitable contribution carryforward deducted in the current year.

Regardless of any deficit in current E & P, distributions during the year are taxed as dividends to the extent of accumulated E & P.

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.

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2019. -Interest received from municipal bonds in 2019.

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

A distribution in excess of E & P is treated as capital gain by shareholders.

All cash distributions received from a corporation with a positive balance in accumulated E & P at the beginning of the year will be taxed as dividend income.