Exam 18: Corporate Taxation: Nonliquidating Distributions

Buckeye Company is owned equally by James and his brother Terrelle,each of whom own 500 shares in the company.Terrelle wants to reduce his ownership in the company,and it was decided that the company will redeem 200 of his shares for $5,000 per share on December 31,20X3.Terrelle's income tax basis in each share is $1,000.Buckeye has current E&P of $10,000,000 and accumulated E&P of $20,000,000.What is the amount and character (capital gain or dividend)recognized by Terrelle because of the stock redemption?

Sam owns 70 percent of the stock of Club Corporation.Unrelated individuals own the remaining 30 percent.For a stock redemption of Sam's stock to be treated as an exchange under the "substantially disproportionate" test,what percentage of Club stock must Sam own after the redemption?

Evergreen Corporation distributes land with a fair market value of $50,000 to its sole shareholder.Evergreen's tax basis in the land is $200,000.Evergreen will deduct a tax loss of $150,000 on the distribution regardless of whether its E&P is positive or negative.

Which of these items is not an adjustment to taxable income or net loss to compute current E&P?

Sara owns 60 percent of the stock of Lea Corporation.Unrelated individuals own the remaining 40 percent.For a stock redemption of Sara's stock to be treated as an exchange under the "substantially disproportionate" test,what percentage of Lea stock must Sara own after the redemption?

Stock distributions are always tax-free to the recipient shareholder.

General Inertia Corporation made a pro rata distribution of $50,000 to Tiara,Inc.in partial liquidation of the company on December 31,20X3.Tiara,Inc.owns 500 shares (50 percent)of General Inertia.The distribution was in exchange for 250 shares of Tiara's stock in the company.After the partial liquidation,Tiara continued to own 50 percent of the remaining stock in General Inertia.At the time of the distribution,the shares had a fair market value of $200 per share.Tiara's income tax basis in the shares was $100 per share.General Inertia had total E&P of $800,000 at the time of the distribution.What amount of dividend or capital gain does Tiara recognize because of the transaction?

Catamount Company had current and accumulated E&P of $500,000 at December 31,20X3.On December 31,the company made a distribution of land to its sole shareholder,Caroline West.The land's fair market value was $200,000 and its tax and E&P basis to Catamount was $250,000.The tax consequences of the distribution to Catamount in 20X3 would be:

Yellowstone Corporation made a distribution of $300,000 to Cheney,Inc.in partial liquidation of the company on December 31,20X3.Cheney,Inc.owns 50 percent of Yellowstone Corporation (1,000 shares).The other 50 percent is owned by an unrelated corporation.The distribution was in exchange for 50 percent of Cheney's stock in the company (500 shares).At the time of the distribution,the shares had a fair market value of $800 per share.Cheney's income tax basis in the shares was $500 per share.Yellowstone had total E&P of $5,000,000 at the time of the distribution.What is the amount and character (capital gain or dividend)of any income or gain recognized by Cheney as a result of the partial liquidation?

St.Clair Company reports positive current E&P of $500,000 in 20X3 and positive accumulated E&P at the beginning of the year of $400,000.St.Clair Company distributed $600,000 to its sole shareholder,Danielle Brush,on December 31,20X3.Danielle's tax basis in her St.Clair stock is $120,000.How much of the $600,000 distribution is treated as a dividend to Danielle,and what is her basis in St.Clair stock after the distribution?

Comet Company is owned equally by Pat and his sister Pam,each of whom hold 100 shares in the company.Pam wants to reduce her ownership in the company,and it was decided that the company will redeem 50 of her shares for $1,000 per share on December 31,20X3.Pam's income tax basis in each share is $500.Comet has total E&P of $250,000.What are the tax consequences to Pam because of the stock redemption?

Packard Corporation reported taxable income of $1,000,000 in 20X3 and paid federal income taxes of $340,000.Included in the taxable income computation was a dividends received deduction of $5,000,a net capital loss carryover from 20X2 of $10,000 utilized in 20X3,and gain of $50,000 recognized on the collection of cash from an installment sale that took place in 20X1.The corporation's current E&P for 20X3 would be:

Battle Corporation redeems 20 percent of its stock for $100,000 in a stock redemption that is treated as an exchange by the shareholders.Battle's E&P at the date of the redemption is $200,000.Battle must reduce its E&P by $100,000 because of the redemption.

Which of the following individuals is not considered "family" for purposes of applying the stock attribution rules to a stock redemption?

Aztec Company reports current E&P of $200,000 in 20X3 and a deficit of ($100,000)in accumulated E&P at the beginning of the year.Aztec distributed $300,000 to its sole shareholder on January 1,20X3.How much of the distribution is treated as a dividend in 20X3?

Cedar Corporation incurs a net capital loss of $20,000 in 20X3 that is carried forward to 20X4.However,Cedar will deduct the net capital loss in the computation of current E&P for 20X3.

Which of the following are subtractions from taxable income in computing current E&P?

A corporation's "E&P" account is equal to the company's "retained earnings" account on its balance sheet.

Green Corporation has a deficit in current E&P of ($100,000)and positive accumulated E&P of $250,000.A $50,000 distribution from Green to its sole shareholder will be treated as a dividend.

The term "E&P" is well-defined in the Internal Revenue Code.