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Exam 13: Corporations: Earnings Profits and Distributions

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Question 31

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Corporate shareholders generally receive less favorable tax treatment from a qualifying stock redemption than from a dividend distribution.

A) True
B) False

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Question 32

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Regardless of any deficit in current E & P,distributions during the year are taxed as dividends to the extent of accumulated E & P.

A) True
B) False

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Question 33

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

Tracy and Lance,equal shareholders in Macaw Corporation,receive $600,000 each in distributions on December 31 of the current year.Macaw's current year taxable income is $1 million and it has no accumulated E & P.Last year,Macaw sold an appreciated asset for $1,200,000 (basis of $400,000) .Payment for one-half of the sale of the asset was made this year.How much of Tracy's distribution will be taxed as a dividend?

Stacey and Andrew each own one-half of the stock in Parakeet Corporation,a calendar year taxpayer.Cash distributions from Parakeet are: $350,000 to Stacey on April 1 and $150,000 to Andrew on May 1.If Parakeet's current E & P is $60,000,how much is allocated to Andrew's distribution?

A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation's E & P.

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

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. )

To determine E & P,some (but not all)previously excluded income items are added back to taxable income.

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:

Tangelo Corporation has an August 31 year-end.Tangelo had $50,000 in accumulated E & P at the beginning of its 2016 fiscal year (September 1,2015) and during the year,it incurred a $75,000 operating loss.It also distributed $65,000 to its sole shareholder,Cass,on November 30,2015.If Cass is a calendar year taxpayer,how should she treat the distribution when she files her 2015 income tax return (assuming the return is filed by April 15,2016) ?

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:

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?

If a stock dividend is taxable,the shareholder's basis in the newly received shares is equal to the fair market value of the shares received in the distribution.

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

Maria owns 75% and Christopher owns 25% of Cockatoo Corporation,a calendar year taxpayer.Cockatoo makes a $600,000 distribution to Maria on April 1 and a $200,000 distribution to Christopher on May 1.Cockatoo's current E & P is $120,000 and its accumulated E & P is $500,000.What are the tax implications of the distributions to Maria and Christopher?

The terms "earnings and profits" and "retained earnings" are identical in meaning.

Albatross Corporation acquired land for investment purposes in 2001 at a cost of $100,000.Albatross sold the land to Monty on December 30,2015,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 2016 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 2015 and 2016.

Briefly describe the reason a corporation might distribute a property dividend to a shareholder in lieu of a cash distribution.Describe the tax effects of the property distribution on the shareholder and on the corporation.

What is a constructive dividend? Provide several examples of the term.