Exam 4: Corporate Nonliquidating Distributions

Identify which of the following statements is true.

Identify which of the following statements is true.

Marie owns one- half of the stock of Starke Corporation and serves as its President. The remaining stock is owned by 10 investors, none of whom owns more than 10% of the outstanding shares. Marie entered a hedge agreement with the corporation three years ago about salary payments that are declared unreasonable compensation by the IRS. Two years ago, the Corporation paid Marie a salary and bonus of $500,000. The IRS subsequently held that $200,000 of the salary is unreasonable compensation. Last year, Starke Corporation and the IRS agreed that $150,000 of the compensation is, in fact, unreasonable. This year, the $150,000 is repaid by Marie to the corporation. How much of the $500,000 compensation was taxable to Marie when originally paid and how much is taxable in the current year?

Tia receives a $15,000 cash distribution from Main Corporation in March of the current year. Main has $6,000 of accumulated E&P at the beginning of the year and $12,000 of current E&P. Main also distributed $15,000 in cash to Betty, who purchased all 300 shares of Main stock from Tia in June of the current year. What tax issues should be considered with respect to the distributions paid to Tia and Betty?

Identify which of the following statements is true.

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.

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

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

Maury Corporation has 200 shares of stock outstanding as follows: How many shares is Amy deemed to own under the Sec. 318 attribution rules?

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

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

In the current year, Ho Corporation sells land that has a $6,000 basis and a $10,000 FMV to Henry, an unrelated individual. Henry makes a $2,500 down payment this year and will pay Ho $2,500 per year for the next three years, plus interest on the unpaid balance at a rate acceptable to the IRS. Ho's realized gain is $4,000. Since Ho is not in the business of selling land, it will use the installment method of accounting. How does this transaction affect Ho's E&P in the current year and the three subsequent years?

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

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.

The gross estate of a decedent contains $2,000,000 cash and 100% of Davis Corporation stock worth $600,000. Funeral and administrative expenses and state death taxes allowable as estate tax deductions amount to $400,000. The estate owes no other liabilities. The decedent's Davis stock can be

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?

Ace Corporation has a single class of stock outstanding. Alan owns 200 shares of the common stock, which he purchased for $50 per share two years ago. On April 10, of the current year, Ace Corporation distributes to its shareholders one right to purchase a share of common stock at $60 per share for each share of common stock held. At the time of the distribution, the common stock is worth $75 per share, and the rights are worth $15 per right. On September 10, Alan sells 100 rights for $2,000 and exercises the remaining 100 rights. He sells 60 of the acquired with the rights for $80 each on November 10. a) What is the amount and character of income Alan recognizes when he receives the rights? b) What is the amount and character of gain or loss Alan recognizes when he sells the rights? c) What is the amount and character of gain or loss Alan recognizes when he exercises the rights? d) What is the amount and character of gain or loss Alan recognizes when he sells the new common stock? e) What basis does Alan have in his remaining shares?

Define Sec. 306 stock.

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).

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?