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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 71

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Use of MACRS cost recovery when computing taxable income does not require an E & P adjustment.

A) True
B) False

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Question 72

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Puffin Corporation's 2,000 shares outstanding are owned as follows: Paul, 800 shares; Sandra (Paul's sister), 800 shares; and Greta (Paul's granddaughter), 400 shares. During the current year, Puffin (E & P of $1 million) redeemed 600 shares of Paul's stock for $100,000. If Paul had acquired the 600 shares five years ago for $30,000, he will have a long-term capital gain of $70,000 from the redemption.

A) True
B) False

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Question 73

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Jen, the sole shareholder of Mahogany Corporation, sold her stock to Jason on July 1 for $90,000. Jen's stock basis at the beginning of the year was $60,000. Mahogany made a $30,000 cash distribution to Jen immediately before the sale, while Jason received a $60,000 cash distribution from Mahogany on November 1. As of the beginning of the current year, Mahogany had $16,000 in accumulated E & P, while current E & P (before distributions) is $30,000. What are the tax consequences of these transactions to Jen and Jason?

At the beginning of the current year, Paul and John each own 50% of Apple Corporation. In July, Paul sold his stock to Sarah for $110,000. At the beginning of the year, Apple Corporation had accumulated E & P of $200,000 and its current E & P is $250,000 (prior to any distributions). Apple distributed $260,000 on March 1 ($130,000 to Paul and $130,000 to John) and distributed another $260,000 on October 1 ($130,000 to Sarah and $130,000 to John). What are the tax implications of the $130,000 distribution to Sarah?

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?

Daisy Corporation is the sole shareholder of Ostrich Corporation, which it hopes to sell within the next three years. The Ostrich stock (basis of $25 million) is currently worth $30 million, but Daisy believes that it would be easier to find a buyer if it was worth less. To lower the value of its stock, Ostrich distributes $4 million cash to Daisy (sufficient E & P exists to cover the distribution). At a later date, Daisy sells Ostrich for $26 million. a. What are the tax consequences to Daisy on the sale? b. What would be the tax consequences if Ostrich had not first distributed the $4 million in cash and Daisy sold the Ostrich stock for $30 million?

Christian, the president and sole shareholder of Venture Corporation, is paid an annual salary of $150,000. Christian would like to draw additional funds from the corporation but is concerned that increased salary might cause the IRS to contend his salary is unreasonable. Further, Christian does not want the corporation to pay any dividends. He would like to contribute $40,000 to his alma mater to establish scholarships for needy students. If Christian makes a pledge to the university to provide $40,000 for scholarships, would there be a problem if Venture Corporation paid the pledge on his behalf? Explain.

Distributions by a corporation to its shareholders are presumed to be a dividend unless the parties can prove otherwise.

Thrush, Inc., is a calendar year, accrual basis corporation with Henry as its sole shareholder (basis in his stock is $90,000). On January 1 of the current year, Thrush Corporation has accumulated E & P of $200,000. Before considering the effect of the distribution described below, the corporation's current E & P is $50,000. On November 1, Thrush distributes an office building to Henry. The office building has an adjusted basis of $80,000 (fair market value of $100,000) and is subject to a mortgage of $110,000. Assume that the building has been depreciated using the ADS method for both income tax and E & P purposes. What are the tax consequences of the distribution to Thrush and to Henry? (In your answer, be sure to describe the effects on taxable income for both Thrush and Henry, the impact of the distribution on Thrush's E & P, and Henry's basis in the building.)

Tan Corporation paid interest expense on a debt incurred in financing a redemption of its stock. The interest expense is not deductible since it was incurred in connection with a stock redemption.

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?

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:

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.

No E & P adjustment is required for regular tax gains under the installment method.

Kite Corporation has 1,000 shares of stock outstanding. Kent owns 300 shares, Kent's father owns 200 shares, Kent's daughter owns 100 shares, and Kent's aunt owns 200 shares. Plover Corporation owns the other 200 shares in Kite Corporation. Kent owns 75% of the stock in Plover Corporation. Applying the § 318 stock attribution rules, how many shares does Kent own in Kite Corporation?

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:

As a result of a redemption, a shareholder's interest (direct and indirect) in the corporation decreased from 80% to 55%. The redemption qualifies for sale or exchange treatment as a disproportionate redemption.

Explain the stock attribution rules that apply in the case of stock redemptions.

How does the definition of accumulated E & P differ from the definition of current E & P?

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?