Exam 4: Corporate Nonliquidating Distributions

A corporation distributes land and the related liability in a nonliquidating distribution to a shareholder. The land (a capital asset) has an adjusted basis of $70,000, an FMV of $100,000 and is subject to a mortgage of $120,000. The corporation must recognize

Van owns all 1,000 shares of Valley Metal Corporation stock. The stock has a $100,000 FMV. Karen wants to purchase the stock from Van but has only $70,000. Valley Metal has ample cash, which is not needed for operations. Which of the following best qualifies for bootstrap redemption treatment and no constructive dividends to the purchaser?

In 2010, Tru Corporation deducted $5,000 of bad debts. It received no tax benefit from the deduction because it had an NOL in 2010 that it was unable to carry back or forward. In 2011, Tru recovered $4,000 of the amount due. a) What amount must Tru include in income in 2011? b) What effect does the $4,000 have on E&P in 2011, if any?

Good Times Corporation has a $60,000 accumulated E&P balance at the beginning of the year and incurs a $100,000 deficit during the year. Because of its poor operating performance, Good Times pays only three of its usual $10,000 quarterly dividend payments to its sole shareholder: those ordinarily paid March 31, June 30, and September 30. How are the March 31, June 30, and September 30 payments of $10,000 treated?

Identify which of the following statements is false.

Corporations may always use retained earnings as a substitute for earnings and profits.

When computing E&P and taxable income, different depreciation methods are often used. What happens when the taxpayer sells such assets?

Define Sec. 306 stock.

Peter owns all 100 shares of Parker Corporation's stock. His basis in the stock is $30,000. Parker Corporation has $300,000 of E&P. Parker Corporation redeems 25 of Peter's shares for $90,000. What are the consequences to Peter and to Parker Corporation?

In a nontaxable distribution of stock rights, when the value of the rights is less than 15% of the value of the stock with respect to which the rights were distributed, the basis of the rights is zero unless the shareholder elects to allocate stock basis to the rights.

White Corporation is a calendar-year taxpayer. Wilhelmina owns all of its stock. Her basis for the stock is $25,000. On March 1 of the current year (not a leap year), White Corporation distributes $60,000 to Wilhelmina. Determine the tax consequences of the cash distribution to Wilhelmina in each of the following independent situations: a) Current E&P $15,000, accumulated E&P $50,000. b) Current E&P $25,000, accumulated E&P $(25,000). c) Current E&P ($36,500), accumulated E&P $65,000. d) Current E&P ($10,000), accumulated E&P $(25,000).

Identify which of the following statements is false.

Bart, a 50% owner of Atlas Corporation's common stock, receives a distribution of a new class of Atlas preferred stock having a $40,000 FMV. Bart's basis in the Atlas common stock is $30,000. Its FMV is $80,000 on the distribution date. One year later, the corporation redeems the preferred stock for $75,000. At the time the stock was issued, the corporation's current and accumulated E&P was $80,000. At the end of the year of redemption, the current and accumulated E&P is $25,000. No other distributions out of E&P were made in the year of redemption. What are the tax consequences of the transaction?