Exam 5: Corporations Earnings Profits and Dividend Distributions

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?

Property distributed by a corporation as a dividend is subject to a liability in excess of its basis. For purposes of determining gain on the distribution, the basis of the property is treated as being not less than the amount of liability.

Briefly describe the rationale for the reduced tax rate on dividends for individual taxpayers.

Lena is the sole shareholder and president of Gold Corporation. She feels that she can justify at least a $50,000 bonus this year because of her performance for the company. However, rather than a bonus in the form of a salary, she considers having Gold pay her a $50,000 dividend. She believes this would be preferable because it will be taxed at only 15% instead of her marginal rate of 35%. Her CPA has advised her to pay a $75,000 bonus in lieu of the $50,000 dividend. Assuming that Gold Corporation is in a 34% tax bracket, should Lena take the $50,000 dividend or the $75,000 bonus? Support your answer by computing the after-tax cost of the two alternatives to Gold and to Lena.

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 2016. -Gain realized, but not recognized, in a like-kind exchange transaction in 2016.

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

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?

Purple Corporation has accumulated E & P of $100,000 on January 1, 2016. In 2016, Purple has current E & P of $130,000 (before any distribution). On December 31, 2016, the corporation distributes $250,000 to its sole shareholder, Cindy (an individual). Purple Corporation's E & P as of January 1, 2017 is:

Briefly describe the reason a corporation might distribute a property dividend to a shareholder in lieu of a cash distribution. Describe the tax effects of the property distribution on the shareholder and on the corporation.

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

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 2016. -Loss on sale between related parties in 2016.

A corporate shareholder that receives a constructive dividend cannot apply a dividends received deduction to the distribution.

On January 30, Juan receives a nontaxable distribution of stock rights from Platinum Corporation. Each right entitles the holder to purchase one share of stock for $40. One right is issued for every share of stock owned. Juan owns 100 shares of stock purchased two years ago for $4,000. At the date of distribution, the rights are worth $1,000 (100 rights at $10 per right) and Juan's stock in Platinum is worth $5,000 (or $50 per share). On December 1, Juan sells all 100 stock rights for $12 per right. How much gain does Juan recognize on the sale?

Which of the following is not a consequence of the double tax on dividends?

Ten years ago, Carrie purchased 2,000 shares of common stock 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:

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

When computing E & P, taxable income is not adjusted for § 179 expense.

Gold Corporation has accumulated E & P of $2 million as of January 1 of the current year. During the year, it expects to have earnings from operations of $1,680,000 and to distribute $900,000 in cash to shareholders. Gold Corporation also expects to sell an asset for a loss of $2 million. Thus, it anticipates incurring a deficit of $320,000 for the year. What can Gold do to minimize the amount of dividend income to its shareholders?

Purple Corporation makes a property distribution to its sole shareholder, Paul. The property distributed is a house (fair market value of $189,000; basis of $154,000) that is subject to a $245,000 mortgage that Paul assumes. Before considering the consequences of the distribution, Purple's current E & P is $35,000 and its accumulated E & P is $140,000. Purple makes no other distributions during the current year. What is Purple's taxable gain on the distribution of the house?