Exam 5: Corporations: Earnings and Profits and Dividend Distributions

Brown Corporation, an accrual basis corporation, has taxable income of $150,000 in the current year. Included in its determination of taxable income are the following transactions. ∙ Brown incurred a $65,000 capital loss from the sale of stock. Because Brown had no capital gains this year, none of the loss is deductible. ∙ The corporation's Federal income tax liability is $31,500. ∙ Brown incurred $18,000 in nondeductible meal expenses. ∙ Brown uses the LIFO method when accounting for inventory. This year, the company's LIFO recapture amount increased by $3,000. ∙ Brown claimed a dividends received deduction of $1,500. What is Brown's current E & P for the year?

Distributions by a corporation to its shareholders are presumed to be a dividend unless the parties can prove otherwise.

Provide a brief outline on computing current E & P.

Maria owns 75% and Christopher owns 25% of Cockatoo Corporation, a calendar year taxpayer. Cockatoo makes a $600,000 distribution to Maria on April 1 and a $200,000 distribution to Christopher on May 1. Cockatoo's current E & P is $120,000 and its accumulated E & P is $500,000. What are the tax implications of the distributions to Maria and Christopher?

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. -Excess capital loss in year incurred.

Daisy Corporation is the sole shareholder of Ostrich Corporation, which it hopes to sell within the next three years. The Ostrich stock basis of $25 million) is currently worth $30 million, but Daisy believes that it would be easier to find a buyer if it was worth less. To lower the value of its stock, Ostrich distributes $4 million cash to Daisy sufficient E & P exists to cover the distribution). At a later date, Daisy sells Ostrich for $26 million. a. What are the tax consequences to Daisy on the sale? b. What would be the tax consequences if Ostrich had not first distributed the $4 million in cash and Daisy sold the Ostrich stock for $30 million?

Briefly define the term "earnings and profits."

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?

Federal income tax paid in the current year must be subtracted from taxable income to determine E & P.

No E & P adjustment is required for regular tax gains under the installment method.

In the current year, Carnation Corporation has a § 179 expense of $20,000. As a result, in the current year, taxable income must be increased by $16,000 to determine current E & P.

During the current year, Hawk Corporation sold equipment for $600,000 adjusted basis of $360,000). The equipment was purchased a few years ago for $760,000 and $400,000 in MACRS deductions have been claimed. ADS depreciation would have been $300,000. As a result of the sale, the adjustment to taxable income needed to determine current E & P is:

Tangelo Corporation has an August 31 year-end. Tangelo had $50,000 in accumulated E & P at the beginning of its 2020 fiscal year September 1, 2019) and during the year, it incurred a $75,000 operating loss. It also distributed $65,000 to its sole shareholder, Cass, on November 30, 2019. If Cass is a calendar year taxpayer, how should she treat the distribution when she files her 2019 income tax return assuming the return is filed by April 15, 2020)?

To determine current E & P, taxable income must be increased for any dividends received deduction.

Constructive dividends do not need to satisfy the legal requirements for a dividend as set forth by applicable state law.

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:

At the beginning of the current year, both Paul and John own 50% of Apple Corporation. In July, Paul sold his stock to Sarah for $110,000. At the beginning of the year, Apple Corporation had accumulated E & P of $200,000 and its current E & P is $250,000 prior to any distributions). Apple distributed $260,000 on March 1 $130,000 to Paul and $130,000 to John) and distributed another $260,000 on October 1 $130,000 to Sarah and $130,000 to John). What are the tax implications of the $130,000 distribution to Sarah?

Finch Corporation E & P of $400,000) distributed machinery $10,000 adjusted basis, $150,000 fair market value) to its sole shareholder, Kathleen. The property is subject to a $50,000 mortgage, which Kathleen assumed. How much dividend income does Kathleen recognize as a result of the distribution and what is her basis in the machinery?

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. -Federal income tax refunds from tax paid in prior years.

Jen, the sole shareholder of Mahogany Corporation, sold her stock to Jason on July 1 for $90,000. Jen's stock basis at the beginning of the year was $60,000. Mahogany made a $30,000 cash distribution to Jen immediately before the sale, and Jason received a $60,000 cash distribution from Mahogany on November 1. As of the beginning of the current year, Mahogany had $16,000 in accumulated E & P, and current E & P before distributions) is $30,000. What are the tax consequences of these transactions to Jen and Jason?