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Exam 5: Corporations: Earnings Profits and Dividend Distributions

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Question 21

Multiple Choice

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Robin Corporation distributes furniture (basis of $40,000;fair market value of $50,000) as a property dividend to its shareholders.The furniture is subject to a liability of $55,000.Robin Corporation recognizes gain of:

A) $55,000.
B) $15,000.
C) $10,000.
D) $0.
E) None of the above.

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

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Question 22

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

A) $150,000.
B) $140,000.
C) $110,000.
D) $70,000.
E) None of the above.

F) C) and D)
G) A) and C)

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Question 23

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Nondeductible meal and entertainment expenses must be subtracted from taxable income to determine current E & P.

Under certain circumstances,a distribution can generate (or add to)a deficit in E & P.

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.

Constructive dividends have no effect on a distributing corporation's 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.

Which of the following is not a consequence of the double tax on dividends?

Which one of the following statements is false?

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.

Sylvia owns 25% of Cormorant Corporation.Cormorant 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?

In the current year,Warbler Corporation (E & P of $250,000) made the following property distributions to its shareholders (all corporations) : Warbler Corporation is not a member of a controlled group.As a result of 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:

Brown Corporation,an accrual basis corporation,has taxable income of $150,000 in the current year.Included in its determination of taxable income are the following transactions. What is Brown's current E & P for the year?

A loss in current E & P is treated as occurring ratably during the year,unless the taxpayer can show otherwise.

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

A corporate shareholder that receives a constructive dividend cannot apply a dividends received deduction to the distribution.

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:

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

An increase in the LIFO recapture amount must be added to taxable income to determine E & P.