Exam 4: Corporate Nonliquidating Distributions

Identify which of the following statements is true.

Susan owns 150 of the 200 outstanding shares of Parent Corporation's stock. Parent owns 160 of the 200 outstanding shares of Subsidiary Corporation's stock. Susan sells 50 shares of her Parent stock to Subsidiary for $40,000. Susan's basis in her Parent shares is $15,000 ($100 per share). Subsidiary Corporation and Parent Corporation have E&P of $60,000 and $25,000, respectively, at the end of the year in which the redemption occur a) What is the amount and character of Susan's gain or loss on the sale? b) What is Susan's basis in her remaining shares of Parent stock? c) How does the sale affect the E&P of Parent and Subsidiary Corporations? d) What basis does Subsidiary Corporation take in the Parent shares it purchases? e) How would your answer to Part (a) change if Susan instead sells 100 of her Parent shares to Subsidiary Corporation for $80,000?

Which of the following statements best describes a bootstrap acquisition?

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?

Alice owns 56% of Daisy Corporation's stock and 50% of May Corporation's stock. Alice sells one- half of her interest in May Corporation to Daisy Corporation for $30,000. The E&P balances of Daisy and May are $25,000 and $35,000, respectively. Alice's basis in her Daisy stock is $40,000 and her basis in the May stock is $38,000. What are the tax consequences of the transaction?

Wills Corporation, which has accumulated a current E&P totaling $70,000, distributes land to its sole shareholder, an individual. The land has an FMV of $75,000 and an adjusted basis of $60,000. The shareholder assumes a $15,000 liability associated with the land. The transaction will have the following tax consequences.

Identify which of the following statements is false. A) Adjustments to taxable income when computing E&P do not include tax- exempt interest. B) At formation, a corporation's E&P depends on the amount of capital contributed by the shareholders. C) For E&P dividend distribution purposes, property as defined in Sec. 317(a) includes money. D) The function of E&P is to provide a measure of a corporation's economic ability to pay dividends.

Identify which of the following increases Earnings & Profits.

Peach Corporation was formed four years ago. Its current E&P (or E&P deficit) and distributions for the most recent four years are as follows: Year Current E\&P (Deficit) Distributions 2005 (\ 20,000) \ 2,000 2006 8,000 4,000 2007 (5,000) 0 2008 25,000 4,000 What is Peach's accumulated E&P at the beginning of 2006, 2007, 2008, and 2009?

Identify which of the following statements is true.

Splash Corporation has $50,000 of taxable income before any charitable contribution deduction. Splash contributed $20,000 to a qualified charitable organization. Due to the 10% of taxable income limitation on charitable contribution deductions, Splash's contribution deduction is limited to $5,000. What effect does the charitable contribution have on current and future E&P?

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?

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?

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

White Corporation is a calendar- year taxpayer. Wilhelmina owns all of its stock. Her basis for the stock is $25,00 March 1 of the current year (not a leap year), White Corporation distributes $60,000 to Wilhelmina. Determine th 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).

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

On April 1, Delta Corporation distributes $120,000 in cash to each of its two equal shareholders, Sarah and Matt. At the time of the distribution, Delta's E&P is $160,000. Sarah's basis in her stock is $50,000 and Matt's basis in his stock is $20,000. How are the distributions characterized to Sarah and Matt? Be specific.

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?

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?

One consequence of a property distribution by a corporation to a shareholder is that