Exam 5: Corporations: Earnings Profits and Dividend Distributions

In the current year, Warbler Corporation (E & P of $250,000) made the following property distributions to its shareholders (all corporations): ​ Warbler Corporation is not a member of a controlled group. As a result of the distribution:

The terms "earnings and profits" and "retained earnings" are identical in meaning.

On January 2, 2015, Orange Corporation purchased equipment for $300,000 with an ADS recovery period of 10 years and a MACRS useful life of 7 years. Section 179 was not elected. MACRS depreciation properly claimed on the asset, including depreciation in the year of sale, totaled $79,605. The equipment was sold on July 1, 2016, for $290,000. As a result of the sale, the adjustment to taxable income needed to arrive at current E & P is:

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.​ -State income tax paid in the current year.

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.​ -Excess capital loss in year incurred.

Aaron and Michele, equal shareholders in Cavalier Corporation, receive $25,000 each in distributions on December 31 of the current year. During the current year, Cavalier sold an appreciated asset for $60,000 (basis of $15,000). Payment for the sale of the asset will be made as follows: 50% next year and 50% in the following year, with interest payable at a rate of 6 percent. Before considering the effect of the asset sale, Cavalier's current year E & P is $40,000 and it has no accumulated E & P. How much of Aaron's distribution will be taxed 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.​ -Dividends received deduction.

Which of the following statements regarding constructive dividends is not correct?

Briefly discuss the rules related to distributions of non-cash property.

Dividends paid to shareholders who hold both long and short positions do not qualify for the reduced tax rate available to individuals in certain years.

Provide a brief outline on computing 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 -Gain on installment sale in 2015 deferred until 2016.

Renee, the sole shareholder of Indigo Corporation, sold her stock to Chad on July 1 for $180,000. Renee's stock basis at the beginning of the year was $120,000. Indigo made a $60,000 cash distribution to Renee immediately before the sale, while Chad received a $120,000 cash distribution from Indigo on November 1. As of the beginning of the current year, Indigo had $26,000 in accumulated E & P, while current E & P (before distributions) was $90,000. Which of the following statements is correct?

Falcon Corporation ended its first year of operations with taxable income of $250,000. At the time of Falcon's formation, it incurred $50,000 of organizational expenses. In calculating its taxable income for the year, Falcon claimed an $8,000 deduction for the organizational expenses. What is Falcon's current E & P?

Kite Corporation, a calendar year taxpayer, has taxable income of $360,000 for 2016. Among its transactions for the year are the following: Disregarding any provision for Federal income taxes, determine Kite Corporation's current E & P for 2016.

If there is sufficient E & P, a distribution of nonconvertible preferred stock to common shareholders is taxable.

On January 1, Eagle Corporation (a calendar year taxpayer) has accumulated E & P of $300,000. During the year, Eagle incurs a net loss of $420,000 from operations that accrues ratably. On June 30, Eagle distributes $180,000 to Libby, its sole shareholder, who has a basis in her stock of $112,500. How much of the $180,000 is a dividend to Libby?

As of January 1, Cassowary Corporation has a deficit in accumulated E & P of $100,000. For the tax year, current E & P (accrued ratably) is $240,000 (prior to any distributions). On July 1, Cassowary Corporation distributes $275,000 to its sole shareholder. The amount of the distribution that is a dividend is:

Nondeductible meal and entertainment expenses must be subtracted from taxable income to determine current E & P.

Under certain circumstances, a distribution can generate (or add to) a deficit in E & P.