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Exam 10: Corporations: Earnings Profits and Distributions

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Question 41

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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:

A) $150,000.
B) $140,000.
C) $110,000.
D) $70,000.
E) None of the above.

F) A) and D)
G) A) and C)

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Question 42

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On January 1,Tulip Corporation (a calendar year taxpayer)has accumulated E & P of $300,000.Its current E & P for the year is $90,000 (before considering dividend distributions).During the year,Tulip distributes $600,000 ($300,000 each)to its equal shareholders,Anne and Tom.Anne has a basis in her stock of $65,000,while Tom's basis is $120,000.What is the effect of the distribution by Tulip Corporation on Anne and Tom?

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Anne and Tom each have dividend income o...

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Question 43

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Brown Corporation,an accrual basis corporation,has taxable income of $150,000 in the current year.Included in its determination of taxable income are the following transactions. What is Brown's current E & P for the year?

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?

Timothy owns 100% of Forsythia Corporation's stock.Corporate employees and annual salaries include Timothy ($300,000); Richard,Timothy's son ($80,000); Rita,Timothy's daughter ($100,000); and Sandy ($120,000).The operation of Forsythia Corporation is shared about equally between Timothy and Sandy (an unrelated party).Richard and Rita are full-time college students at a university about 150 miles away.Forsythia Corporation has substantial E & P but has not distributed a dividend for the past five years.Discuss problems related to the salary arrangement for Forsythia Corporation.

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?

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.

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

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?

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?

Tern Corporation,a cash basis taxpayer,has taxable income of $500,000 for the current year.Tern elected $100,000 of § 179 expense.It also had a related party loss of $20,000 and a realized (not recognized) gain from an involuntary conversion of $75,000.It paid Federal income tax of $150,000 and paid a nondeductible fine of $10,000.Tern's current E & P is:

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?

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.

Silver Corporation,a calendar year taxpayer,has taxable income of $550,000.Among its transactions for the year are the following: Collection of proceeds from insurance policy on life of corporate officer (in excess of cash surrender value) $~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~$ $82,500 Realized gain(not recognized) on an involuntary conversion $~~~~~~~~~~~~~~~$ 11,000 Nondeductible fines and penalties $~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~\quad$ 44,000 Disregarding any provision for Federal income taxes,Silver Corporation's current E & P is:

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?

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

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?

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

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:

In the current year,Warbler Corporation (E & P of $250,000) made the following property distributions to its shareholders (all corporations) : $\begin{array} { l l l } &\text {Adjuted } & \text {Fair Market } \\&\underline{\text {Baris }} & \underline{\text {Value }} \\\text{Pink Corporation stock (held for investment) }&\$ 150,000 & \$ 120,000 \\\text{Non-LIFO inventory}&80,000 & 110,000\end{array}$ Warbler Corporation is not a member of a controlled group.As a result of the distribution: