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Exam 5: Corporations: Earnings Profits and Dividend Distributions

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Question 1

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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?

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Scarlet's E & P is increased by the $20,...

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

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Accumulated E & P is the total of all pr...

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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.

During the current year,Goose Corporation sold equipment for $500,000 (adjusted basis of $260,000) .The equipment was purchased a few years ago for $560,000 and $300,000 in MACRS deductions have been claimed.ADS depreciation would have been $200,000.As a result of the sale,the adjustment to taxable income needed to determine current E & P is:

The tax treatment of corporate distributions at the shareholder level does not depend on:

On January 1,Gull Corporation (a calendar year taxpayer) has accumulated E & P of $200,000.During the year,Gull incurs a net loss of $280,000 from operations that accrues ratably.On June 30,Gull distributes $120,000 to Sharon,its sole shareholder,who has a basis in her stock of $75,000.How much of the $120,000 is a dividend to Sharon?

Constructive dividends do not need to satisfy the legal requirements for a dividend as set forth by applicable state law.

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

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.

Orange Corporation has a deficit in accumulated E & P of $600,000 and has current E & P of $450,000.On July 1,Orange distributes $500,000 to its sole shareholder,Morris,who has a basis in his stock of $105,000.As a result of the distribution,Morris has:

A corporation borrows money to purchase State of Texas bonds.The interest on the loan has no impact on either taxable income or current E & P.

When current E & P has a deficit and accumulated E & P is positive,the two accounts are netted at the date of the distribution.If a positive balance results,the distribution is a dividend to the extent of the balance.

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.

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?

When a corporation makes an installment sale,for E & P purposes the realized gain is recognized in the year of sale.

Ashley,the sole shareholder of Hawk Corporation,has a stock basis of $200,000 at the beginning of the year.On July 1,she sells all of her stock to Matt for $1 million.On January 1,Hawk has accumulated E & P of $90,000 and during the year,current E & P of $160,000.Hawk makes the following cash distributions: $270,000 to Ashley on March 31 and $90,000 to Matt on December 1.How are the distributions taxed to Ashley and Matt? What is Ashley's recognized gain on the sale to Matt?

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

Goldfinch Corporation distributes stock rights to its shareholders.How is the basis of the stock rights received by Goldfinch's shareholders determined?

In the current year,Carnation Corporation has a § 179 expense of $40,000.As a result,in the current year,taxable income must be increased by $32,000 to determine current E & P.