Exam 5: Corporations: Earnings Profits and Dividend Distributions

Maria owns 75% and Christopher owns 25% of Cockatoo Corporation, a calendar year taxpayer. Cockatoo makes a $600,000 distribution to Maria on April 1 and a $200,000 distribution to Christopher on May 1. Cockatoo's current E & P is $120,000 and its accumulated E & P is $500,000. What are the tax implications of the distributions to Maria and Christopher?

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Question 1

Correct Answer:

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Current E & P is allocated on a pro rata basis to each distribution made during the year. Cockatoo Corporation made $800,000 of distributions during the year. Christopher's distribution represents 25% ($200,000/$800,000) of that amount. Consequently, 25% of Cockatoo's current E & P, or $30,000 ($120,000 × 25%), is allocated to Christopher's distribution. Maria's distribution represents 75% ($600,000/$800,000) of total distributions. Consequently, 75% of Cockatoo's current E & P, or $90,000 ($120,000 × 75%), is allocated to Maria's distribution. Accumulated E & P is applied in chronological order beginning with the earliest distribution. When Maria's distribution is made, Cockatoo has $590,000 of dividend-paying capacity ($500,000 of accumulated E & P plus $90,000 of current E & P). Therefore, $590,000 of Maria's distribution is treated as a dividend with the balance ($10,000) being a return of capital (to the extent of her stock basis) and then a capital gain. After this distribution, Cockatoo has no accumulated E & P remaining. When Christopher's distribution is made, Cockatoo has $30,000 remaining in current E & P. Therefore, $30,000 of Christopher's distribution is treated as a dividend with the balance ($170,000) being a return of capital (to the extent of his stock basis) and then a capital gain. After the distribution to Christopher, Cockatoo has no remaining current or accumulated E & P.

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2015 -Gain realized, but not recognized, in a like-kind exchange transaction in 2015.

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Question 2

Correct Answer:

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Tracy and Lance, equal shareholders in Macaw Corporation, receive $600,000 each in distributions on December 31 of the current year. Macaw's current year taxable income is $1 million and it has no accumulated E & P. Last year, Macaw sold an appreciated asset for $1,200,000 (basis of $400,000). Payment for one-half of the sale of the asset was made this year. How much of Tracy's distribution will be taxed as a dividend?

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Question 3

Correct Answer:

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Briefly define the term "earnings and profits."

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Question 4

At the beginning of the current year, Doug and Alfred each own 50% of Amaryllis Corporation (a calendar year taxpayer). In July, Doug sold his stock to Kevin for $140,000. At the beginning of the year, Amaryllis Corporation had accumulated E & P of $240,000 and its current E & P is $280,000 (prior to any distributions). Amaryllis distributed $300,000 on February 15 ($150,000 to Doug and $150,000 to Alfred) and distributed another $300,000 on November 1 ($150,000 to Kevin and $150,000 to Alfred). Kevin has dividend income of:

(Multiple Choice)

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Question 5

Using the legend provided, classify each statement accordingly. In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2015. -Proceeds of life insurance received upon the death of a key employee (policy had no cash surrender value).

(Multiple Choice)

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Question 6

Robin Corporation distributes furniture (basis of $40,000; fair market value of $50,000) as a property dividend to its shareholders. The furniture is subject to a liability of $55,000. Robin Corporation recognizes gain of:

(Multiple Choice)

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Question 7

Brett owns stock in Oriole Corporation (basis of $100,000) as an investment. Oriole distributes property (fair market value of $375,000; basis of $187,500) to him during the year. Oriole has current E & P of $25,000 (which includes the E & P gain on the property distribution), accumulated E & P of $100,000, and makes no other distributions during the year. What is Brett's capital gain on the distribution?

(Multiple Choice)

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Question 8

In general, how are current and accumulated earnings and profits allocated to corporate distributions?

(Short Answer)

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Question 9

On January 1, Tulip Corporation (a calendar year taxpayer) has accumulated E & P of $300,000. Its current E & P for the year is $90,000 (before considering dividend distributions). During the year, Tulip distributes $600,000 ($300,000 each) to its equal shareholders, Anne and Tom. Anne has a basis in her stock of $65,000, while Tom's basis is $120,000. What is the effect of the distribution by Tulip Corporation on Anne and Tom?

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Question 10

Blue Corporation has a deficit in accumulated E & P of $300,000 and has current E & P of $225,000. On July 1, Blue distributes $250,000 to its sole shareholder, Sam, who has a basis in his stock of $52,500. As a result of the distribution, Sam has:

(Multiple Choice)

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Question 11

A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation's E & P.

(True/False)

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Question 12

Dividends taxed as ordinary income are considered investment income for purposes of the investment interest expense limitation.

(True/False)

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Question 13

The tax treatment of corporate distributions at the shareholder level does not depend on:

(Multiple Choice)

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Question 14

Thistle Corporation declares a nontaxable dividend payable in rights to subscribe to common stock. One right and $25 entitle the holder to subscribe to one share of stock. One right is issued for each share of stock held. Annette, a shareholder, owns 200 shares of stock that she purchased five years ago for $3,000. At the date of distribution of the rights, the market values were $50 per share for the stock and $25 for a right. Annette received 200 rights. She exercises 160 rights and purchases 160 additional shares of stock. She sells the remaining 40 rights for $1,080. What are the tax consequences to Annette?

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Question 15

A deficit in current E & P is treated as occurring ratably during the year, unless the taxpayer can show otherwise.

(True/False)

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Question 16

Scarlet Corporation is an accrual basis, calendar year corporation. Scarlet distributes inventory (basis of $20,000; fair market value of $40,000) to Frank, its shareholder. Assuming that Scarlet has $500,000 of current E & P, what is the impact of the distribution on Scarlet Corporation and on Frank?

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Question 17

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2015 -Interest received from municipal bonds in 2015.

(Multiple Choice)

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Question 18

Ten years ago, Carrie purchased 2,000 shares in Osprey Corporation for $20,000. In the current year, Carrie receives a nontaxable stock dividend of 20 shares of Osprey preferred. Values at the time of the dividend are: $8,000 for the preferred stock and $72,000 for the common. Based on this information, Carrie's basis in the stock is:

(Multiple Choice)

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Question 19

Tern Corporation, a cash basis taxpayer, has taxable income of $500,000 for the current year. Tern elected $25,000 of § 179 expense. It also had a related party loss of $20,000 and a realized (not recognized) gain from an involuntary conversion of $75,000. It paid Federal income tax of $150,000 and paid a nondeductible fine of $10,000. Tern's current E & P is:

(Multiple Choice)

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Question 20

Showing 1 - 20 of 114

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2015 -Gain realized, but not recognized, in a like-kind exchange transaction in 2015.

Briefly define the term "earnings and profits."

Using the legend provided, classify each statement accordingly. In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2015. -Proceeds of life insurance received upon the death of a key employee (policy had no cash surrender value).

Robin Corporation distributes furniture (basis of $40,000; fair market value of $50,000) as a property dividend to its shareholders. The furniture is subject to a liability of $55,000. Robin Corporation recognizes gain of:

In general, how are current and accumulated earnings and profits allocated to corporate distributions?

Blue Corporation has a deficit in accumulated E & P of $300,000 and has current E & P of $225,000. On July 1, Blue distributes $250,000 to its sole shareholder, Sam, who has a basis in his stock of $52,500. As a result of the distribution, Sam has:

A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation's E & P.

Dividends taxed as ordinary income are considered investment income for purposes of the investment interest expense limitation.

The tax treatment of corporate distributions at the shareholder level does not depend on:

A deficit in current E & P is treated as occurring ratably during the year, unless the taxpayer can show otherwise.

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2015 -Interest received from municipal bonds in 2015.

Understanding and Working With the Federal Tax Law

Corporations: Introduction and Operating Rules

Corporations: Special Situations

Corporations: Organization and Capital Structure

Corporations: Redemptions and Liquidations

Corporations: Reorganizations

Consolidated Tax Returns

Taxation of International Transactions

Partnerships: Formation, Operation, and Basis

Partnerships: Distributions, Transfer of Interests, and Terminations

S Corporations

Comparative Forms of Doing Business

Taxes on the Financial Statements

Exempt Entities

Multistate Corporate Taxation

Tax Practice and Ethics

The Federal Gift and Estate Taxes

Family Tax Planning

Income Taxation of Trusts and Estates

Filters

Exam 5: Corporations: Earnings Profits and Dividend Distributions

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2015 -Gain realized, but not recognized, in a like-kind exchange transaction in 2015.

Briefly define the term "earnings and profits."

Using the legend provided, classify each statement accordingly. In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2015.​ -Proceeds of life insurance received upon the death of a key employee (policy had no cash surrender value).

Robin Corporation distributes furniture (basis of $40,000; fair market value of $50,000) as a property dividend to its shareholders. The furniture is subject to a liability of $55,000. Robin Corporation recognizes gain of:

In general, how are current and accumulated earnings and profits allocated to corporate distributions?

Blue Corporation has a deficit in accumulated E & P of $300,000 and has current E & P of $225,000. On July 1, Blue distributes $250,000 to its sole shareholder, Sam, who has a basis in his stock of $52,500. As a result of the distribution, Sam has:

A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation's E & P.

Dividends taxed as ordinary income are considered investment income for purposes of the investment interest expense limitation.

The tax treatment of corporate distributions at the shareholder level does not depend on:

A deficit in current E & P is treated as occurring ratably during the year, unless the taxpayer can show otherwise.

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2015 -Interest received from municipal bonds in 2015.

Understanding and Working With the Federal Tax Law

Corporations: Introduction and Operating Rules

Corporations: Special Situations

Corporations: Organization and Capital Structure

Corporations: Redemptions and Liquidations

Corporations: Reorganizations

Consolidated Tax Returns

Taxation of International Transactions

Partnerships: Formation, Operation, and Basis

Partnerships: Distributions, Transfer of Interests, and Terminations

S Corporations

Comparative Forms of Doing Business

Taxes on the Financial Statements

Exempt Entities

Multistate Corporate Taxation

Tax Practice and Ethics

The Federal Gift and Estate Taxes

Family Tax Planning

Income Taxation of Trusts and Estates

Filters

Using the legend provided, classify each statement accordingly. In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2015. -Proceeds of life insurance received upon the death of a key employee (policy had no cash surrender value).