Exam 18: Corporate Taxation: Nonliquidating Distributions

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 theredemption is $200,000. Battle must reduce its earnings and profits by $100,000 because of the redemption.

Wonder Corporation declared a common stock dividend to all shareholders of record on September 30, 20X3. Shareholders will receive three shares of Wonder stock for each five shares of stock they already own. Diana owns 300 shares of Wonder stock with a tax basis of $90 per share (a total basis of $27,000). The fair market value of the Wonderstock was $180.00 per share on September 30, 20X3. What are the tax consequences of the stock dividend to Diana?

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 inexchange for 50% 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 aresult of the partial liquidation?

Half Moon Corporation made a distribution of $300,000 to Arnold Swartz in partial liquidation of the company on December 31, 20X3. Arnold owns 100% of Half Moon Corporation (1,200 shares). The distribution was in exchange for 50% of Arnold's stock in the company (600 shares). At the time of the distribution, the shares had a fair market value of $500 per share. Arnold's income tax basis in the shares was $250 per share. Half Moon had total E&P of $2,000,000 at the time of the distribution. What is the amount and character (capital gain or dividend) of any income or gain recognized by Arnold as a result of the partial liquidation?

Which statement best describes the concept of the "double taxation" of corporation income?

Green Corporation has negative current earnings and profits of ($100,000) and positiveaccumulated earnings and profits of $250,000. A $50,000 distribution from Green to its sole shareholder will be treated as a dividend because total earnings and profits is apositive $150,000.

Beaver Company reports current E&P of $100,000 in 20X3 and accumulated E&P at the beginning of the year of $200,000. Beaver distributed $400,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in her stock in Beaver is $200,000. How is the distribution treated by the shareholder in 20X3?

Bruin Company reports current E&P of $200,000 in 20X3 and accumulated E&P at the beginning of the year of $100,000. Bruin distributed $400,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?

Which of the following payments could be treated as a constructive dividend by the IRS?

A distribution from a corporation to a shareholder will always be treated as a dividendfor tax purposes.

Sara owns 60 percent of the stock of Lea Corporation. Unrelated individuals own theremaining 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?

Comet Company is owned equally by Pat and his sister Pam, each of whom hold 100 shares in the company. Comet redeems 50 of Pam's shares on December 31, 20X3, for$1,000 per share in a transaction that Pam treats as an exchange for tax purposes. Comet has total E&P of $250,000 on December 31, 20X3. What are the tax consequences to Comet because of the stock redemption?

Which of the following statements best describes the role of current and accumulated earnings and profits in determining if a distribution is a dividend?

A distribution from a corporation to a shareholder will only be treated as a dividend fortax purposes if the distribution is paid out of current or accumulated earnings and profits.

A stock redemption is always treated as a sale or exchange for tax purposes.

Viking Corporation is owned equally by Sven and his wife Olga, each of whom hold 100 shares in the company. Viking redeemed 75 shares of Sven's stock in the company on December 31, 20X3. Viking paid Sven $2,000 per share. His income tax basis in each share is $1,000. Viking has total E&P of $500,000. What are the tax consequences to Sven because of the stock redemption?

Tammy owns 60 percent of the stock of Huron Corporation. Unrelated individuals own the remaining 40 percent. For a stock redemption to be treated as an exchange under the "substantially disproportionate" rule, the redemption must reduce Tammy's stockownership in Huron Corporation below 48 percent.

Only taxable income and deductible expenses are included in the computation of currentearnings and profits.

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 earnings and profits for 20X3 would be:

Erie Corporation reported taxable income of $2,200,000 in 20X3 before any deduction for anypayment to its sole shareholder and employee, LaBron Cleveland. Erie paid a bonus of $200,000 toLaBron at year-end. Erie Corporation is subject to a flat-rate tax of 34%. The bonus meets therequirements to be "reasonable" and is therefore deductible by Erie. LaBron is subject to a marginal tax rate of 35% on the bonus. What is the total federal income tax imposed on the corporate income earned by Erie and paid to LaBron as a bonus?