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Exam 18: Corporate Taxation: Nonliquidating Distributions

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Question 41

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Otter Corporation reported taxable income of $400,000 from operations for 20X3.The company paid federal income taxes of $136,000 on this taxable income.During the year,the company made a distribution of land to its sole shareholder,Emmet Jugg.The land's fair market value was $50,000 and its tax and E&P basis to Otter was $30,000.Emmet assumed a mortgage attached to the land of $10,000.The company had accumulated E&P of $900,000 at the beginning of the year.Compute Otter's total taxable income and federal income tax paid because of the distribution (assume a tax rate of 21 percent).Using your solution,compute Otter's current E&P for 20X3.

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Taxable income of $4...

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Question 42

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Beaver Company reports current E&P of $100,000 in 20X3 and accumulated E&P at the beginning of the year of $200,000.Beaver distributed $400,000 to its sole shareholder on January 1,20X3.The shareholder's tax basis in her stock in Beaver is $200,000.How is the distribution treated by the shareholder in 20X3?

A) $400,000 dividend.
B) $100,000 dividend,$200,000 tax-free return of basis,and $100,000 capital gain.
C) $200,000 dividend and $200,000 tax-free return of basis.
D) $300,000 dividend and $100,000 tax-free return of basis.

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Question 43

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Beltway Company is owned equally by George,his brother Thomas,and a partnership owned 50 percent by George and his father,Abe.Each of the three shareholders holds 100 shares in the company.Under the §318 stock attribution rules,how many shares of Beltway stock is George deemed to own?

Corona Company is owned equally by Maria,her sister Carlita,her mother,Gabriella,and her grandmother Olivia,each of whom hold 100 shares in the company.Under the family attribution rules,how many shares of Corona stock is Maria deemed to own?

Viking Corporation is owned equally by Sven and his wife,Olga,each of whom hold 100 shares in the company.Viking redeemed 75 shares of Sven's stock for $2,000 per share on December 31,20X3.Viking has total E&P of $500,000.What are the tax consequences to Viking because of the stock redemption?

A distribution from a corporation to a shareholder will only be treated as a dividend for tax purposes if the distribution is paid out of current or accumulated E&P.

Erie Corporation reported taxable income of $2,200,000 in 20X3 before any deduction for any payment to its sole shareholder and employee,LaBron Cleveland.Erie paid a bonus of $200,000 to LaBron at year-end.Erie Corporation is subject to a flat-rate tax of 21 percent.The bonus meets the requirements to be "reasonable" and is therefore deductible by Erie.LaBron is subject to a marginal tax rate of 35 percent on the bonus.What is the total federal income tax imposed on the corporate income earned by Erie and paid to LaBron as a bonus?

Tammy owns 100 shares in Star Struck Corporation.The other 100 shares are owned by her husband,Tommy.Which of the following statements is true?

Evergreen Corporation distributes land with a fair market value of $200,000 to its sole shareholder.Evergreen's tax basis in the land is $50,000.Assuming sufficient E&P,the amount of dividend reported by the shareholder is $200,000.

Husker Corporation reports a deficit in current E&P of ($200,000) in 20X3 and accumulated E&P at the beginning of the year of $300,000.Husker distributed $200,000 to its sole shareholder on December 31,20X3.The shareholder's tax basis in her stock in Husker is $50,000.How is the distribution treated by the shareholder in 20X3?

Loon,Inc.reported taxable income of $600,000 in 20X3 and paid federal income taxes of $202,000.Not included in the company's computation of taxable income is tax-exempt interest of $30,000,disallowed meals and entertainment expenses of $15,000,and disallowed expenses related to the tax-exempt income of $4,000.Loon deducted depreciation of $200,000 on its tax return.Under the alternative (E&P)depreciation method,the deduction would have been $80,000.Compute the company's current E&P for 20X3.

General Inertia Corporation made a distribution of $50,000 to Henry Tiara in partial liquidation of the company on December 31,20X3.Henry owns 500 shares (50 percent) of General Inertia.The distribution was in exchange for 250 shares of Henry's stock in the company.After the partial liquidation,Henry continued to own 50 percent of the remaining stock in General Inertia.At the time of the distribution,the shares had a fair market value of $200 per share.Henry's income tax basis in the shares was $100 per share.General Inertia had total E&P of $800,000 at the time of the distribution.What are the tax consequences to Henry because of the transaction?

Lansing Company is owned equally by Jennifer,her husband,Dan,and DeWitt Corporation,which is owned 50 percent by Jennifer and her sister Jane.Each of the three shareholders holds 100 shares in the company.Under the §318 stock attribution rules,how many shares of Lansing stock is Jennifer deemed to own?

Half Moon Corporation made a distribution of $300,000 to Arnold Swartz in partial liquidation of the company on December 31,20X3.Arnold owns 100 percent of Half Moon Corporation (1,200 shares).The distribution was in exchange for 50 percent of Arnold's stock in the company (600 shares).At the time of the distribution,the shares had a fair market value of $500 per share.Arnold's income tax basis in the shares was $250 per share.Half Moon had total E&P of $2,000,000 at the time of the distribution.What is the amount and character (capital gain or dividend)of any income or gain recognized by Arnold as a result of the partial liquidation?

A calendar-year corporation has positive current E&P of $500 and a deficit in accumulated E&P of ($1,200) .The corporation makes a $400 distribution to its sole shareholder.Which of the following statements is true?

Tappan declared a 100 percent stock distribution to all shareholders of record on May 2 of this year.Prior to the distribution,Tappan reported current E&P of $60,000 and accumulated E&P of $30,000.Prior to the split,Barb owned 100 shares of Tappan stock,with a market value of $150 per share and a tax basis of $100 per share.After the distribution,Barb owned 200 shares of Tappan,with a market value of $80 per share.What is the per-share tax basis of Barb's additional 100 shares?

Walloon,Inc.reported taxable income of $1,000,000 in 20X3 and paid federal income taxes of $210,000.The company reported a capital gain from sale of investments of $150,000,which was partially offset by a $40,000 net capital loss carryover from 20X2,resulting in a net capital gain of $110,000 included in taxable income.Compute the company's current E&P for 20X3.

Madison Corporation reported taxable income of $400,000 in 20X3 and accrued federal income taxes of $136,000.Included in the computation of taxable income was regular depreciation of $200,000 (E&P depreciation is $60,000) and a net capital loss carryover of $20,000 from 20X2 utilized in 20X3.The corporation's current E&P for 20X3 would be:

Crystal,Inc.is owned equally by John and his wife,Arlene,each of whom own 500 shares in the company.Arlene wants to reduce her ownership in the company,and it was decided that the company will redeem 200 of her shares for $5,000 per share on December 31,20X3.Arlene's income tax basis in each share is $1,000.Crystal has current E&P of $1,000,000 and accumulated E&P of $3,000,000.What is the amount and character (capital gain or dividend)recognized by Arlene as a result of the stock redemption,assuming only the "substantially disproportionate with respect to the shareholder" test is applied?

Tammy owns 60 percent of the stock of Huron Corporation.Unrelated individuals own the remaining 40 percent.For a stock redemption of a portion of Tammy's shares to be treated as an exchange under the "substantially disproportionate" rule,the redemption must reduce Tammy's stock ownership in Huron Corporation below 48 percent.