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Exam 7: Corporate Taxation: Non-Liquidating Distributions

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Question 41

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Longhorn Company reports current E&P of $115,000 in 20X3 and a deficit of ($230,000) in accumulated E&P at the beginning of the year. Longhorn distributed $345,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in his stock in Longhorn is $115,000. How is the distribution treated by the shareholder in 20X3?

A) $345,000 dividend
B) $115,000 dividend, $115,000 tax-free return of basis, and $115,000 capital gain
C) $115,000 dividend and $230,000 tax-free return of basis
D) $0 dividend, $115,000 tax-free return of basis, and $230,000 capital gain

E) A) and D)
F) None of the above

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Question 42

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Crystal, Incorporated is owned equally by John and his wife, Arlene, each of whom owns 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?

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$1,000,000 dividend.
Arlene reduces her ...

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Question 43

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Yellowstone Corporation made a distribution of $300,000 to Cheney, Incorporated in partial liquidation of the company on December 31, 20X3. Cheney, Incorporated owns 50 percent of Yellowstone Corporation (1,000 shares). The other 50 percent is owned by an unrelated corporation. The distribution was in exchange for 50percent of Cheney's stock in the company (500 shares). At the time of the distribution, the shares had a fair market value of $800 per share. Cheney's income tax basis in the shares was $500 per share. Yellowstone had total E&P of $5,000,000 at the time of the distribution. What is the amount and character (capital gain or dividend) of any income or gain recognized by Cheney as a result of the partial liquidation?

Greenwich Corporation reported a net operating loss of $800,000 in 20X3, which the corporation elected to carry forward to 20X4. The computation of the loss did not include a disallowed fine of $50,000, life insurance proceeds of $500,000, and a current-year charitable contribution of $10,000 that will be carried forward to 20X4. The corporation's current E&P for 20X3 would be:

Loon, Incorporated reported taxable income of $650,000 in 20X3 and paid federal income taxes of $207,000. Not included in the company's computation of taxable income is tax-exempt interest of $35,000, disallowed meals and entertainment expenses of $17,500, and disallowed expenses related to the tax-exempt income of $4,500. Loon deducted depreciation of $225,000 on its tax return. Under the alternative (E&P) depreciation method, the deduction would have been $85,000. Compute the company's current E&P for 20X3.

Which of the following statements is true?

This year Truckit reported taxable income of $160,000 and received $20,000 of municipal interest. Truckit paid $55,000 in entertainment expenses and $15,000 in fines and penalties. Truckit had $50,000 of accumulated E&P at the beginning of the year. What is Truckit's current E&P?

A distribution in partial liquidation of a corporation is always treated as a sale or exchange by an individual shareholder.

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. Evergreen will report a gain of $150,000 on the distribution regardless of whether its E&P is positive or negative.

A stock redemption is always treated as a sale or exchange for tax purposes.

Ozark Corporation reported taxable income of $500,000 from operations for 20X3. During the year, the company made a distribution of land to its sole shareholder, Marcus Twain. The land's fair market value was $100,000 and its tax and E&P basis to Ozark was $125,000. Marcus assumed a mortgage attached to the land of $25,000. Ozark's tax rate is 21 percent. The company had accumulated E&P of $850,000 at the beginning of the year. Compute Ozark's total taxable income and federal income tax paid because of the distribution. Using your solution, compute Ozark's accumulated E&P at January 1, 20X4.

Paladin Corporation had current and accumulated E&P of $500,000 at December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Maria Mendez. The land's fair market value was $200,000 and its tax and E&P basis to Paladin was $250,000. Maria assumed a liability of $25,000 attached to the land. The tax consequences of the distribution to Paladin in 20X3 would be:

Sam owns 70 percent of the stock of Club Corporation. Unrelated individuals own the remaining 30 percent. For a stock redemption of Sam's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Club stock must Sam own after the redemption?

Tar Heel Corporation had current and accumulated E&P of $570,000 at December 31 20X3. On December 31, the company made a distribution of land to its sole shareholder, William Roy. The land's fair market value was $170,000 and its tax and E&P basis to Tar Heel was $32,000. William assumed a mortgage attached to the land of $13,500. The tax consequences of the distribution to William in 20X3 would be:

The recipient of a taxable stock distribution will have a tax basis in the stock equal to the fair market value of the stock received.

Tar Heel Corporation had current and accumulated E&P of $500,000 at December 31 20X3. On December 31, the company made a distribution of land to its sole shareholder, William Roy. The land's fair market value was $100,000 and its tax and E&P basis to Tar Heel was $25,000. William assumed a mortgage attached to the land of $10,000. The tax consequences of the distribution to William in 20X3 would be:

Comet Company is owned equally by Pat and his sister Pam, each of whom holds 100 shares in the company. Comet redeems 50 of Pam's shares on December 31, 20X3, for $1,000 per share in a transaction that Pam treats as an exchange for tax purposes. Comet has total E&P of $160,000 on December 31, 20X3. What are the tax consequences to Comet because of the stock redemption?

Superior Corporation reported taxable income of $2,000,000 in 20X3. Superior paid a dividend of $200,000 to its sole shareholder, Mary Yooper. Superior Corporation is subject to a flat-rate tax of 21 percent. The dividend meets the requirements to be a "qualified dividend," and Mary is subject to a tax rate of 15 percent on the dividend. What is the total federal income tax imposed on the corporate income earned by Superior, including taxes on the amount distributed to Mary as a dividend?

Viking Corporation is owned equally by Sven and his wife, Olga, each of whom holds 100 shares in the company. Viking redeemed 75 shares of Sven's stock in the company on December 31, 20X3. Viking paid Sven $2,000 per share. His income tax basis in each share is $1,000. Viking has total E&P of $500,000. What are the tax consequences to Sven because of the stock redemption?

Orchard, Incorporated reported taxable income of $800,000 in 20X3 and paid federal income taxes of $272,000. Included in the company's computation of taxable income is gain from sale of a depreciable asset of $200,000. The income tax basis of the asset was $50,000. The E&P basis of the asset using the alternative depreciation system was $75,000. Compute the company's current E&P for 20X3.