Exam 19: Corporations: Distributions Not in Complete Liquidation

Ashley, the sole shareholder of Hawk Corporation, has a stock basis of $200,000 at the beginning of the year. On July 1, she sells all of her stock to Matt for $1 million. On January 1, Hawk has accumulated E & P of $90,000 and during the year, current E & P of $160,000. Hawk makes the following cash distributions: $270,000 to Ashley on March 31 and $90,000 to Matt on December 1. How are the distributions to Ashley and Matt taxed? What is Ashley's recognized gain on the sale to Matt?

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

Which of the following is an incorrect statement regarding the application of the § 318 stock attribution rules?

Matching 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 2019. -Premiums paid on key employee life insurance policy (assume no increase in cash surrender value of policy) in 2019.

Kite Corporation, a calendar year taxpayer, has taxable income of $360,000 for 2020. Among its transactions for the year are the following: Collection of proceeds from insurance policy on life of corporate officer (in excess of cash surrender value) \ 9,000 Realized gain (not recognized) on an involuntary conversion 10,000 Nondeductible fines and penalties 21,000 Disregarding any provision for Federal income taxes, determine Kite Corporation's current E & P for 2020.

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

Leon owns 750 shares of the 2,000 outstanding shares of Crane Corporation (E & P of $900,000). None of the other shareholders of Crane is related to Leon. Leon acquired his Crane shares 10 years ago for $80,000. Crane has operated several trades or businesses for more than 5 years. In the current year, Crane sells the assets of one of those trades or businesses and distributes the proceeds from the asset sale to the shareholders in a pro rata stock redemption. In this transaction, Leon receives $250,000 in redemption of 300 shares of Crane. As a result of this transaction, Leon will recognize:

During the year, Blue Corporation distributes land to its sole shareholder. If the fair market value of the land is less than its adjusted basis, Blue will not be able to recognize a loss on the distribution.

Briefly define the term "earnings and profits."

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:

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:

Grackle Corporation (E & P of $600,000) distributes cash of $200,000 and land (fair market value of $400,000; basis of $250,000) to a shareholder in a qualifying stock redemption. The land distributed is subject to a mortgage of $460,000. Grackle will recognize a gain of $210,000 as a result of the distribution.

The rules used to determine the taxability of stock dividends also apply to distributions of stock rights.

Briefly discuss the rules related to distributions of noncash property.

Rose Corporation (a calendar year taxpayer) has taxable income of $300,000, and its financial records reflect the following for the year. Federal income taxes paid \ 110,000 Net operating loss carry forward deducted currently 70,000 Gain recognized this year on an installment sale from a prior year 44,000 Depreciation deducted on tax return (ADS depreciation would have been \ 10,000) 40,000 Interest income on Iowa state bonds 8,000 Rose Corporation's current E & P is:

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

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?

Corporate shareholders generally receive less favorable tax treatment from a qualifying stock redemption than from a dividend distribution.

Copper Corporation (E & P of $1.2 million) distributes land (basis of $410,000, fair market value of $650,000) to Lauren, a shareholder, to carry out a qualifying stock redemption. Lauren had a basis of $90,000 in the shares redeemed. Which of the following is an incorrect statement regarding the redemption?

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 2019. -Charitable contribution carryforward deducted in the current year.