Exam 5: Corporations: Earnings Profits and Dividend Distributions

Brown Corporation, an accrual basis corporation, has taxable income of $150,000 in the current year. Included in its determination of taxable income are the following transactions. ∙ Brown incurred a $65,000 capital loss from the sale of stock. Because Brown had no capital gains this year, none of the loss is deductible. ∙ The corporation's Federal income tax liability is $41,750. ∙ Brown incurred $18,000 in nondeductible meal and entertainment expenses. ∙ Brown uses the LIFO method when accounting for inventory. This year, the company's LIFO recapture amount increased by $3,000. ∙ Brown claimed a domestic production activities deduction under § 199 of $1,500. ​ What is Brown's current E & P for the year?

Robin Corporation, a calendar year taxpayer, has a deficit in current E & P of $200,000 and a $580,000 positive balance in accumulated E & P. If Robin determines that a $700,000 distribution to its shareholders is appropriate at some point during the year, what is the maximum amount of the distribution that could potentially be treated as a dividend?

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 -Loss on sale between related parties in 2015.

How does the definition of accumulated E & P differ from the definition of current 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 -Federal income tax refunds from tax paid in prior years.

Maria and Christopher each own 50% of Cockatoo Corporation, a calendar year taxpayer. Distributions from Cockatoo are: $750,000 to Maria on April 1 and $250,000 to Christopher on May 1. Cockatoo's current E & P is $300,000 and its accumulated E & P is $600,000. How much of the accumulated E & P is allocated to Christopher's distribution?

No E & P adjustment is required for regular tax gains under the installment method.

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 -Meal and entertainment expenses not deducted in 2015 because of the 50% limitation.

If a stock dividend is taxable, the shareholder's basis in the newly received shares is equal to the fair market value of the shares received in the distribution.

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) on a like-kind exchange.

Tungsten Corporation, a calendar year cash basis taxpayer, made estimated tax payments of $800 each quarter in 2015, for a total of $3,200. Tungsten filed its 2015 tax return in 2016 and the return showed a tax liability $4,200. At the time of filing, March 15, 2016, Tungsten paid an additional $1,000 in Federal income taxes. How does the additional payment of $1,000 impact Tungsten's E & P?

Regardless of any deficit in current E & P, distributions during the year are taxed as dividends to the extent of accumulated E & P.

Which one of the following statements is false?

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 -Domestic production activities deduction claimed in 2015.

Pink Corporation declares a nontaxable dividend payable in rights to subscribe to common stock. Each right entitles the holder to purchase one share of stock for $25. One right is issued for every two shares of stock owned. Jack owns 100 shares of stock in Pink, which he purchased three years ago for $3,000. At the time of the distribution, the value of the stock is $45 per share and the value of the rights is $2 per share. Jack receives 50 rights. He exercises 25 rights and sells the remaining 25 rights three months later for $2.50 per right.

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 -Cash dividends distributed to shareholders in 2015.

A distribution in excess of E & P is treated as capital gain by shareholders.

Navy Corporation has E & P of $240,000. It distributes land with a fair market value of $70,000 (adjusted basis of $25,000) to its sole shareholder, Troy. The land is subject to a liability of $55,000 that Troy assumes. Troy has:

A corporation borrows money to purchase State of Texas bonds. The interest on the loan has no impact on either taxable income or current E & P.

When computing current E & P, taxable income must be adjusted for the deferred gain in a § 1031 like-kind exchange.