Question 1

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

Accepted Answer

The double tax on dividends creates a number of distortions in the economy, including
1) an incentive to invest in noncorporate taxpayers rather than corporate taxpayers,
2) a preference by corporations to finance operations with debt rather than equity, and
3) a motivation for corporations to retain earnings and to structure distributions to avoid the double tax. Taken together, these distortions raise the cost of capital for corporate investments by causing reliance on debt financing. This increases the vulnerability of corporations during economic downturns. By taxing dividends at a lower rate, policy makers argue that the negative impacts of the double tax are mitigated. As a result, capital formation in the corporate sector should increase, stimulating the economy. Reducing the double tax through a lower tax rate on dividends should also make the United States more competitive internationally.

Question 2

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.
-State income tax paid in the current year.

Accepted Answer

A) Increase 
B) Decrease 
C) No effect 
A) Increase 
B) Decrease 
C) No effect C

Question 3

Certain dividends from foreign corporations can be qualified dividends for purposes of the preferential rate available to individuals.

Accepted Answer

A) True 
 B)False  True

Question 4

How does the definition of accumulated E & P differ from the definition of current E & P?

Accepted Answer

Accumulated E & P is the total of all pr

Question 5

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?

Accepted Answer

Gold should recognize the loss as soon a

Question 6

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?

Accepted Answer

A)  $0 
B)  $75,000 
C)  $150,000 
D)  $300,000 
E)  None of these. 
A)  $0 
B)  $75,000 
C)  $150,000 
D)  $300,000 
E)  None of these.

Question 7

Tracy and Lance, equal shareholders in Macaw Corporation, receive $600,000 each in distributions on December 31 of the current year. Macaw's current-year taxable income is $1 million and it has no accumulated E & P. Last year, Macaw sold an appreciated asset for $1,200,000 basis of $400,000). Payment for one-half of the sale of the asset was made this year. How much of Tracy's distribution will be taxed as a dividend?

Accepted Answer

A)  $0 
B)  $300,000 
C)  $500,000 
D)  $600,000 
E)  None of these. 
A)  $0 
B)  $300,000 
C)  $500,000 
D)  $600,000 
E)  None of these.

Question 8

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.
-Intangible drilling costs deducted currently.

Accepted Answer

A) Increase 
B) Decrease 
C) No effect 
A) Increase 
B) Decrease 
C) No effect

Question 9

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

Accepted Answer

A)  Corporations have an incentive to retain earnings and structure distributions to avoid dividend treatment. 
B)  Corporations have an incentive to invest in noncorporate rather than corporate businesses. 
C)  The cost of capital for corporate investments is increased. 
D)  Corporations have an incentive to finance operations with debt rather than equity. 
E)  All of these are consequences of the double tax on dividends. 
A)  Corporations have an incentive to retain earnings and structure distributions to avoid dividend treatment. 
B)  Corporations have an incentive to invest in noncorporate rather than corporate businesses. 
C)  The cost of capital for corporate investments is increased. 
D)  Corporations have an incentive to finance operations with debt rather than equity. 
E)  All of these are consequences of the double tax on dividends.

Question 10

What is a constructive dividend? Provide several examples of the term.

Accepted Answer

Constructive dividends generally occur i

Question 11

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.
-Cash dividends distributed to shareholders in 2019.

Accepted Answer

A) Increase 
B) Decrease 
C) No effect 
A) Increase 
B) Decrease 
C) No effect

Question 12

In the current year, Warbler Corporation E & P of $250,000) made the following property distributions to its shareholders all corporations): $\begin{array}{lrr} &&\text { Fair Market }\
& \text { Adjusted Basis } & \text { Value } \
\text { Pink Corporation stock (held for investment) } & \$ 150,000 & \$ 120,000 \
\text { Non-LIFO inventory } & 80,000 & 110,000
\end{array}$ Warbler Corporation is not a member of a controlled group. As a result of the distribution:

Accepted Answer

A)  The shareholders have dividend income of $200,000. 
B)  The shareholders have dividend income of $260,000. 
C)  Warbler has a recognized gain of $30,000 and a recognized loss of $30,000. 
D)  Warbler has no recognized gain or loss. 
E)  None of these. 
A)  The shareholders have dividend income of $200,000. 
B)  The shareholders have dividend income of $260,000. 
C)  Warbler has a recognized gain of $30,000 and a recognized loss of $30,000. 
D)  Warbler has no recognized gain or loss. 
E)  None of these.

Question 13

Stephanie is the sole shareholder and president of Hawk Corporation. She feels that she can justify at least a
$220,000 bonus this year because of her performance. However, rather than a bonus in the form of a salary, she plans to have Hawk pay her a $220,000 dividend. Because Stephanie's marginal tax rate is 32%, she prefers to receive a dividend taxed at 15%. Her accountant, however, suggests a $275,000 bonus in lieu of the $220,000 dividend since Hawk Corporation is in the 21% tax bracket. Should Stephanie take the $220,000 dividend or the
$275,000 bonus? Support your answer by computing the after-tax cost of the two alternatives to Hawk and to Stephanie.

Accepted Answer

Stephanie should choose the $275,000 bon

Question 14

Goldfinch Corporation distributes stock rights to its shareholders. How is the basis of the stock rights received by Goldfinch's shareholders determined?

Accepted Answer

The determination of the basis differs,

Question 15

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?

Accepted Answer

A)  $0 
B)  $90,000 
C)  $112,500 
D)  $180,000 
E)  None of these. 
A)  $0 
B)  $90,000 
C)  $112,500 
D)  $180,000 
E)  None of these.

Question 16

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.
-Gain on installment sale in 2019 deferred until 2020.

Accepted Answer

A) Increase 
B) Decrease 
C) No effect 
A) Increase 
B) Decrease 
C) No effect

Question 17

On January 1, Tulip Corporation a calendar year taxpayer) has accumulated E & P of $300,000. Its current E & P for the year is $90,000 before considering dividend distributions). During the year, Tulip distributes $600,000 $300,000 each) to its equal shareholders, Anne and Tom. Anne has a basis in her stock of $65,000, and Tom's basis is $120,000. What is the effect of the distribution by Tulip Corporation on Anne and Tom?

Accepted Answer

Anne and Tom each have dividend income o

Question 18

An increase in the LIFO recapture amount must be added to taxable income to determine E & P.

Accepted Answer

A) True 
 B)False

Question 19

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?

Accepted Answer

A)  $0 
B)  $100,000 
C)  $150,000 
D)  $187,500 
E)  None of these. 
A)  $0 
B)  $100,000 
C)  $150,000 
D)  $187,500 
E)  None of these.

Question 20

Stacey and Eva each own one-half of the stock in Parakeet Corporation, a calendar year taxpayer. Cash distributions from Parakeet are $350,000 to Stacey on April 1 and $150,000 to Eva on May 1. If Parakeet's current E & P is $60,000, how much is allocated to Eva's distribution?

Accepted Answer

A)  $5,000 
B)  $10,000 
C)  $18,000 
D)  $30,000 
E)  None of these. 
A)  $5,000 
B)  $10,000 
C)  $18,000 
D)  $30,000 
E)  None of these.

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

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. -State income tax paid in the current year.

Certain dividends from foreign corporations can be qualified dividends for purposes of the preferential rate available to individuals.

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 2019. -Intangible drilling costs deducted currently.

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

What is a constructive dividend? Provide several examples of the term.

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. -Cash dividends distributed to shareholders in 2019.

Goldfinch Corporation distributes stock rights to its shareholders. How is the basis of the stock rights received by Goldfinch's shareholders determined?

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. -Gain on installment sale in 2019 deferred until 2020.

An increase in the LIFO recapture amount must be added to taxable income to determine E & P.

Stacey and Eva each own one-half of the stock in Parakeet Corporation, a calendar year taxpayer. Cash distributions from Parakeet are $350,000 to Stacey on April 1 and $150,000 to Eva on May 1. If Parakeet's current E & P is $60,000, how much is allocated to Eva's distribution?

Understanding and Working With the Federal Tax Law

The Deduction for Qualified Business Income for Pass-Through Entities

Corporations: Introduction and Operating Rules

Corporations: Organization and Capital Structure

Corporations: Redemptions and Liquidations

Corporations: Reorganizations

Consolidated Tax Returns

Taxation of International Transactions

Partnerships: Formation, Operations, and Basis

Partnerships: Distributions, Transfer of Interests, and Terminations

S Corporations

Comparative Forms of Doing Business

Taxes on the Financial Statements

Exempt Entities

Multistate Corporate Taxation

Tax Practice and Ethics

The Federal Gift and Estate Taxes

Family Tax Planning

Income Taxation of Trusts and Estates

Filters

Exam 5: Corporations: Earnings and Profits and Dividend Distributions

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

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. -State income tax paid in the current year.

Certain dividends from foreign corporations can be qualified dividends for purposes of the preferential rate available to individuals.

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 2019. -Intangible drilling costs deducted currently.

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

What is a constructive dividend? Provide several examples of the term.

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. -Cash dividends distributed to shareholders in 2019.

Goldfinch Corporation distributes stock rights to its shareholders. How is the basis of the stock rights received by Goldfinch's shareholders determined?

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. -Gain on installment sale in 2019 deferred until 2020.

An increase in the LIFO recapture amount must be added to taxable income to determine E & P.

Stacey and Eva each own one-half of the stock in Parakeet Corporation, a calendar year taxpayer. Cash distributions from Parakeet are $350,000 to Stacey on April 1 and $150,000 to Eva on May 1. If Parakeet's current E & P is $60,000, how much is allocated to Eva's distribution?

Understanding and Working With the Federal Tax Law

The Deduction for Qualified Business Income for Pass-Through Entities

Corporations: Introduction and Operating Rules

Corporations: Organization and Capital Structure

Corporations: Redemptions and Liquidations

Corporations: Reorganizations

Consolidated Tax Returns

Taxation of International Transactions

Partnerships: Formation, Operations, and Basis

Partnerships: Distributions, Transfer of Interests, and Terminations

S Corporations

Comparative Forms of Doing Business

Taxes on the Financial Statements

Exempt Entities

Multistate Corporate Taxation

Tax Practice and Ethics

The Federal Gift and Estate Taxes

Family Tax Planning

Income Taxation of Trusts and Estates

Filters