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Exam 5: Corporations: Earnings and Profits and Dividend Distributions

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Question 41

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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 2019. -Proceeds of life insurance received upon the death of a key employee policy had no cash surrender value) .

A) Increase
B) Decrease
C) No effect

D) A) and B)
E) A) and C)

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Question 42

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Aaron and Michele, equal shareholders in Cavalier Corporation, receive $25,000 each in distributions on December 31 of the current year. During the current year, Cavalier sold an appreciated asset for $60,000 basis of $15,000) . Payment for the sale of the asset will be made as follows: 50% next year and 50% in the following year with interest payable at a rate of 6 percent. Before considering the effect of the asset sale, Cavalier's current-year E & P is $40,000 and it has no accumulated E & P. How much of Aaron's distribution will be taxed as a dividend?

A) $0
B) $20,000
C) $25,000
D) $42,500
E) None of these.

F) A) and E)
G) A) and B)

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Question 43

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On January 1, Gold Corporation a calendar year taxpayer) has E & P of $30,000 and generates no additional E & P during the year. On March 31, the corporation distributes $40,000 to its sole shareholder, Ava basis in stock of $8,000). Determine the effect of the distribution on Ava's taxable income and stock basis.

Rust Corporation distributes property to its sole shareholder, Andre. The property has a fair market value of $350,000, an adjusted basis of $205,000, and is subject to a liability of $220,000. Current E & P is $500,000. With respect to the distribution, which of the following statements is correct?

The rules used to determine the taxability of stock dividends also apply to distributions of stock rights.

Scarlet Corporation is an accrual basis, calendar year corporation. Scarlet distributes inventory basis of $20,000; fair market value of $40,000) to Frank, its shareholder. Assuming that Scarlet has $500,000 of current E & P, what is the impact of the distribution on Scarlet Corporation and on Frank?

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

Purple Corporation has accumulated E & P of $100,000 on January 1, 2019. In 2019, Purple has current E & P of $130,000 before any distribution) . On December 31, 2019, the corporation distributes $250,000 to its sole shareholder, Cindy an individual) . Purple Corporation's E & P as of January 1, 2020 is:

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.

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 2019. -Gain realized but not recognized) on a like-kind exchange.

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 2019. -Additional first-year bonus) depreciation deduction claimed in 2019.

A corporation borrows money to purchase State of Texas bonds. The interest on the loan has no impact on either taxable income or current E & P.

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 2019. -A decrease in the LIFO recapture amount during the year.

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

Albatross Corporation acquired land for investment purposes in 2004 at a cost of $100,000. Albatross sold the land to Monty on December 30, 2019, 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 2020 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 2019 and 2020.

Cedar Corporation is a calendar year taxpayer formed in 2015. Cedar's E & P before distributions for each of the past 5 years is listed below. $\begin{array} { l l } 2019 & \$ 28,000 \\2018 & \$ 40,000 \\2017 & \$ 39,000 \\2016 & \$ 68,000 \\2015 & \$ 16,000\end{array}$ Cedar Corporation made the following distributions in the previous 5 years. $\begin{array}{cl}2018 & \text { Land (basis of } \$ 70,000 \text {, fair market value of } \$ 80,000) \\2015 & \$ 20,000 \text { cash }\end{array}$ Cedar's accumulated E & P as of January 1, 2020 is:

Pheasant Corporation, a calendar year taxpayer, has $400,000 of current E & P and a deficit in accumulated E & P of $180,000. If Pheasant pays a $600,000 distribution to its shareholders on July 1, how much dividend income do the shareholders report?

All distributions that are not dividends are a return of capital and decrease the shareholder's basis.

Purple Corporation makes a property distribution to its sole shareholder, Kyung. The property distributed is a house fair market value of $189,000; basis of $154,000) that is subject to a $245,000 mortgage that Kyung assumes. Before considering the consequences of the distribution, Purple's current E & P is $35,000 and its accumulated E & P is $140,000. Purple makes no other distributions during the current year. What is Purple's taxable gain on the distribution of the house?

If stock rights are taxable, the recipient has income to the extent of the fair market value of the rights.