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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 51

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On January 1, Gold Corporation (a calendar year taxpayer) has E & P of $30,000 and generates no additional E & P during the year. On March 31, the corporation distributes $40,000 to its sole shareholder, Wyatt (basis in stock of $8,000). Determine the effect of the distribution on Wyatt's taxable income and stock basis.

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Wyatt recognizes dividend income of $30,...

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Question 52

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Finch Corporation distributes property (basis of $225,000, fair market value of $300,000) to a shareholder in a distribution that is a qualifying stock redemption. The property is subject to a liability of $160,000, which the shareholder assumes. The basis of the property to the shareholder is:

A) $0.
B) $140,000.
C) $225,000.
D) $300,000.
E) None of the above.

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

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Question 53

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Purple Corporation has accumulated E & P of $100,000 on January 1, 2014. In 2014, Purple has current E & P of $130,000 (before any distribution) . On December 31, 2014, the corporation distributes $250,000 to its sole shareholder, Cindy (an individual) . Purple Corporation's E & P as of January 1, 2015 is:

Corporate distributions are presumed to be paid out of E & P and are treated as dividends unless the parties to the transaction can show otherwise.

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.

On January 30, Juan receives a nontaxable distribution of stock rights from Platinum Corporation. Each right entitles the holder to purchase one share of stock for $40. One right is issued for every share of stock owned. Juan owns 100 shares of stock purchased two years ago for $4,000. At the date of distribution, the rights are worth $1,000 (100 rights at $10 per right) and Juan's stock in Platinum is worth $5,000 (or $50 per share) . On December 1, Juan sells all 100 stock rights for $12 per right. How much gain does Juan recognize on the sale?

Lupe and Rodrigo, father and son, each own 50% of the stock outstanding of Heron Corporation (E & P of $400,000) . During the current year, Heron redeems all of Lupe's shares for $250,000. The transaction cannot qualify as a complete termination redemption if:

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?

Bristlebird Corporation (E & P of $700,000) has 3,000 shares of common stock outstanding. Juan owns 1,500 shares and his wife, Roberta, owns 1,500 shares. Juan and Roberta each have a basis of $90,000 in their Bristlebird stock. In the current year, Bristlebird Corporation redeems 1,000 shares from Juan for $250,000. With respect to the distribution in redemption of the Bristlebird stock:

On January 2, 2014, 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, 2015, for $290,000. As a result of the sale, the adjustment to taxable income needed to arrive at current E & P is:

Tern Corporation, a cash basis taxpayer, has taxable income of $500,000 for the current year. Tern elected $100,000 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:

Tangelo Corporation has an August 31 year-end. Tangelo had $50,000 in accumulated E & P at the beginning of its 2015 fiscal year (September 1, 2014) and during the year, it incurred a $75,000 operating loss. It also distributed $65,000 to its sole shareholder, Cass, on November 30, 2014. If Cass is a calendar year taxpayer, how should she treat the distribution when she files her 2014 income tax return (assuming the return is filed by April 15, 2015) ?

Raul's gross estate includes 1,500 shares of stock of Orange Corporation (basis to Raul of $600,000, fair market value on date of death of $4.1 million). The estate will incur $2.2 million of death taxes and funeral and administration expenses, and the adjusted gross estate is $9 million. Denise, Raul's daughter and sole heir of his estate, owns the remaining 500 shares of Orange Corporation's (2,000) shares outstanding. In the current year, Orange (E & P of $5 million) redeems all of the estate's 1,500 shares for $4.1 million. What are the tax consequences of the redemption to Raul's estate?

Hannah, Greta, and Winston own the stock in Redpoll Corporation (E & P of $900,000) as follows: Hannah, 600 shares; Greta, 400 shares; and Winston, 1,000 shares. Greta is Hannah's daughter, and Winston is Hannah's brother. Redpoll Corporation redeems 400 of Hannah's shares (basis of $55,000) for $240,000. Hannah purchased the stock three years ago as an investment. With respect to the stock redemption, Hannah has:

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

Stephanie is the sole shareholder and president of Hawk Corporation. She feels that she can justify at least a $220,000 bonus this year because of her performance. However, rather than a bonus in the form of a salary, she plans to have Hawk pay her a $220,000 dividend. Because Stephanie's marginal tax rate is 35%, she prefers to receive a dividend taxed at 15%. Her accountant, however, suggests a $310,000 bonus in lieu of the $220,000 dividend since Hawk Corporation is in the 34% tax bracket. Should Stephanie take the $220,000 dividend or the $310,000 bonus? Support your answer by computing the after-tax cost of the two alternatives to Hawk and to Stephanie.

Gold Corporation has accumulated E & P of $2 million as of January 1 of the current year. During the year, it expects to have earnings from operations of $1,680,000 and to distribute $900,000 in cash to shareholders. Gold Corporation also expects to sell an asset for a loss of $2 million. Thus, it anticipates incurring a deficit of $320,000 for the year. What can Gold do to minimize the amount of dividend income to its shareholders?

The Code treats corporate distributions that are a return of a shareholder's investment as sales or exchanges and corporate distributions that are a return from a shareholder's investment as dividends.

Ethel, Hannah, and Samuel, unrelated individuals, own the stock in Broadbill Corporation (E & P of $700,000) as follows: Ethel, 300 shares; Hannah, 300 shares; and Samuel, 400 shares. Broadbill redeems 200 of Samuel's shares (basis of $175,000) for $250,000. If Samuel's stock is a capital asset and has been held for over three years, Samuel has:

Certain dividends from foreign corporations can be qualified dividends for purposes of the preferential rate available to individuals.