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Exam 13: Corporations: Earnings Profits and Distributions

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Question 1

True/False

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

A) True
B) False

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Question 2

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When computing E & P, taxable income is not adjusted for § 179 expense.

A) True
B) False

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Question 3

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Starling Corporation has accumulated E & P of $60,000 on January 1, 2016. In 2016, Starling Corporation had an operating loss of $80,000. It distributed cash of $40,000 to Zoe, its sole shareholder, on December 31, 2016. Starling Corporation's balance in its E & P account as of January 1, 2017, is:

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, Hawk Corporation sold equipment for $600,000 (adjusted basis of $360,000) . The equipment was purchased a few years ago for $760,000 and $400,000 in MACRS deductions have been claimed. ADS depreciation would have been $300,000. As a result of the sale, the adjustment to taxable income needed to determine current E & P is:

The built-in loss limitation in a complete liquidation does not apply to losses attributable to a decline in a property's fair market value after its transfer to the corporation.

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?

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 2016. -Gain realized, but not recognized, in a like-kind exchange transaction in 2016.

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

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 2016. -Penalties paid to state government for failure to comply with state law.

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.

Falcon Corporation ended its first year of operations with taxable income of $250,000. At the time of Falcon's formation, it incurred $50,000 of organizational expenses. In calculating its taxable income for the year, Falcon claimed an $8,000 deduction for the organizational expenses. What is Falcon's current E & P?

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

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

When computing current E & P, taxable income must be adjusted for the deferred gain in a § 1031 like-kind exchange.

Tangelo Corporation has an August 31 year-end. Tangelo had $50,000 in accumulated E & P at the beginning of its 2017 fiscal year (September 1, 2016) and during the year, it incurred a $75,000 operating loss. It also distributed $65,000 to its sole shareholder, Cass, on November 30, 2016. If Cass is a calendar year taxpayer, how should she treat the distribution when she files her 2016 income tax return (assuming the return is filed by April 15, 2017) ?

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 2016. -Meal and entertainment expenses not deducted in 2016 because of the 50% limitation.

Seven years ago, Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 2,000 shares of Blue Corporation in a transaction that qualified under § 351. The assets had a tax basis to her of $400,000 and a fair market value of $700,000 on the date of the transfer. In the current year, Blue Corporation (E & P of $1 million) redeems 600 shares from Eleanor for $260,000 in a transaction that qualifies for sale or exchange treatment. With respect to the redemption, Eleanor will have a:

Brett owns stock in Oriole Corporation (basis of $100,000) as an investment. Oriole distributes property (fair market value of $375,000; basis of $187,500) to him during the year. Oriole has current E & P of $25,000 (which includes the E & P gain on the property distribution) , accumulated E & P of $100,000, and makes no other distributions during the year. What is Brett's capital gain on the distribution?

Albatross Corporation acquired land for investment purposes in 2002 at a cost of $100,000. Albatross sold the land to Monty on December 30, 2016, and did not elect out of the installment method of accounting. The selling price of the property was $400,000. Monty made a cash down payment of $50,000 on the date of sale and executed a $350,000 note, payable in seven annual installments of $50,000 each plus interest at the rate of 6% per annum. The first installment of $50,000 was due in 2017 which Monty paid, plus interest of $21,000. Discuss the effect of this sale on Albatross's taxable income and its E & P account in 2016 and 2017.