Exam 4: Corporate Nonliquidating Distributions

When is E&P measured for purposes of determining whether a distribution is a dividend?

The Sec. 318 family attribution rules can be waived for purposes of the Sec. 302(b)(3) complete termination rules even though the redeeming shareholder is a creditor of the corporation.

Grant Corporation sells land (a noninventory item) with a basis of $57,000 for $100,000. Nichole will be paid on an installment basis in five equal annual payments, starting in the current year. The E&P for the year of sale will be increased as a result of the sale (excluding federal income taxes) by

Identify which of the following statements is true.

All of Sphere Corporation's single class of stock is owned by four unrelated individuals in the following manner: Zack 27%, Xu 24.33%, Yvonne 24.33%, and Win 24.33%. Some of Zack's stock holdings are redeemed by Sphere Corporation, resulting in Zack's interest being reduced to 22.27%. Xu, Yvonne, and Win owned equally the remaining 77.73% of the Sphere stock. How should the redemption of Zack's stock be treated by Zack?

In the current year, Pearl Corporation has $300,000 of current and accumulated E&P. On June 3, Pearl Corporation distributes a parcel of land (a capital asset) worth $120,000 to Betty, a shareholder. The land has a $60,000 adjusted basis to Pearl Corporation and is subject to a $16,000 mortgage, which Betty assumes. Assume a 34% marginal corporate tax rate. a) What is the amount and character of the income recognized by Betty as a result of the distribution? b) What is Betty's basis for the land? c) What is the amount and character of Pearl's gain or loss as a result of the distribution? d) What effect does the distribution have on Pearl's E&P?

John, the sole shareholder of Photo Specialty Corporation has had an exceptional year. He is considering issuing himself a large bonus in lieu of a dividend. You are concerned about unreasonable compensation. What issues must be considered?

Strong Corporation is owned by a group of 20 shareholders. During the current year, Strong Corporation pays $225,000 in salary and bonuses to Stedman, its president and controlling shareholder. The IRS audits Strong's tax return and determines that reasonable compensation for Stedman would be $125,000. Strong Corporation agrees to the adjustment. a) What effect does the disallowance of part of the deduction for Stedman's salary and bonuses have on Strong Corporation and Stedman? b) What tax savings could have been obtained by Strong Corporation and Stedman if an agreement had been in effect that required Stedman to repay Strong Corporation any amounts determined by the IRS to be unreasonable?

Rich owns 60 of the 100 outstanding shares of Rainbow Corporation's stock and 80 of the 100 outstanding shares of Oz Corporation's stock. Rich's basis in his Rainbow shares is $12,000, and his basis in his Oz shares is $8,000. Rich sells 30 of his Rainbow shares to Oz Corporation for $50,000. At the end of the year of the sale, Rainbow and Oz Corporations have E&Ps of $25,000 and $40,000, respectively. a) What is the amount and character of Rich's gain or loss? b) What is Rich's basis in his remaining shares of the Rainbow and Oz stock? c) How does the sale affect the E&Ps of Rainbow and Oz Corporations? d) What basis does Oz Corporation take in the Rainbow shares it purchases? e) How would your answer to part (a) change if Rich owns only 50 shares of the 100 outstanding shares of Oz Stock?

Boris owns 60 of the 100 shares outstanding of Bread Corporation stock and 80 of the 100 shares of Butter Corporation stock. His basis in the Bread shares is $10,000 and his basis in his Butter shares is $5,000. Boris sells 30 of his Bread Corporation shares to Butter Corporation for $25,000. Bread Corporation has E&P of $20,000 and Butter Corporation has E&P of $40,000. In applying the substantially disproportionate test to determine if this is a sale or a dividend, Boris is treated as owning how many shares of Bread after the sale?

Identify which of the following statements is true.

Green Corporation is a calendar-year taxpayer. All of the stock is owned by Evan. His basis for the stock is $35,000. On March 1 (of a non-leap year), Green Corporation distributes $120,000 to Evan. Determine the tax consequences of the cash distribution to Evan in each of the following independent situations: Current E&P Accumulated E&P a) $30,000 $100,000 b) 50,000 (50,000) c) (73,000) 40,000 d) (20,000) (50,000)

Bat Corporation distributes stock rights with a $20,000 FMV to its common stock shareholders. The $20,000 value of the stock rights at the time of distribution is less than 15% of the value of the underlying stock. Which of the following statements is true?

Identify which of the following statements is false.

Boxer Corporation buys equipment in January of the current year with a seven-year class life for $15,000. The corporation expensed the $15,000 under Sec. 179. The deduction in the year of purchase for E&P purposes due to the acquisition and expensing of the equipment is

Rose has a $20,000 basis in the 60% of the Parent Corporation stock that she owns. Parent Corporation owns a 70% interest in Child Corporation. Parent and Child have current and accumulated E&P balances of $25,000 and $40,000, respectively. In return for $15,000, Rose sells 10% of the Parent Corporation stock to Child Corporation. What is the impact of the transaction on Rose?

Family Corporation, a corporation controlled by Buddy's family, redeems all of Buddy's stock. For the redemption to be treated as a sale, which one of the following conditions must be met?

Which of the following is not a condition that permits a stock redemption to be treated as a sale?

Corporate distributions that exceed earnings and profits are always capital gains.

An individual shareholder owns 3,000 shares of Baxter Corporation common stock with a basis of $10 per share. She receives a nontaxable 5% stock dividend. The basis per share of the common stock after the stock dividend is