Exam 19: Corporations: Distributions Not in Complete Liquidation

Which one of the following statements is false?

Seven years ago,Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 2,000 shares of Blue Corporation in a transaction that qualified under § 351.The assets had a tax basis to her of $400,000 and a fair market value of $700,000 on the date of the transfer.In the current year,Blue Corporation (E & P of $1 million) redeems 600 shares from Eleanor for $260,000 in a transaction that qualifies for sale or exchange treatment.With respect to the redemption,Eleanor will have a:

A deficit in current E & P is treated as occurring ratably during the year,unless the taxpayer can show otherwise.

At the beginning of the current year,Doug and Alfred each own 50% of Amaryllis Corporation (a calendar year taxpayer).In July,Doug sold his stock to Kevin for $140,000.At the beginning of the year,Amaryllis Corporation had accumulated E & P of $240,000 and its current E & P is $280,000 (prior to any distributions).Amaryllis distributed $300,000 on February 15 ($150,000 to Doug and $150,000 to Alfred) and distributed another $300,000 on November 1 ($150,000 to Kevin and $150,000 to Alfred).Kevin has dividend income of:

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 2015. a.Increase b.Decrease c.No effect -Premiums paid on key employee life insurance policy (assume no increase in cash surrender value of policy) in 2015.

Canary Corporation has 5,000 shares of stock outstanding.It redeems in a qualifying stock redemption 1,200 shares for $475,000 at a time when it has paid-in capital of $300,000 and E & P of $1.5 million.What would be the charge to Canary's E & P as a result of the redemption?

On January 2,2015,Orange Corporation purchased equipment for $300,000 with an ADS recovery period of 10 years and a MACRS useful life of 7 years.Section 179 was not elected.MACRS depreciation properly claimed on the asset,including depreciation in the year of sale,totaled $79,605.The equipment was sold on July 1,2016,for $290,000.As a result of the sale,the adjustment to taxable income needed to arrive at current E & P is:

Kite Corporation has 1,000 shares of stock outstanding.Kent owns 300 shares,Kent's father owns 200 shares,Kent's daughter owns 100 shares,and Kent's aunt owns 200 shares.Plover Corporation owns the other 200 shares in Kite Corporation.Kent owns 75% of the stock in Plover Corporation.Applying the § 318 stock attribution rules,how many shares does Kent own in Kite Corporation?

Which of the following statements is incorrect with respect to determining current E & P?

adjusted to arrive at current E & P for 2015. a.Increase b.Decrease c.No effect -Charitable contribution carryforward deducted in the current year.

adjusted to arrive at current E & P for 2015. a.Increase b.Decrease c.No effect -Intangible drilling costs deducted currently.

Raul's gross estate includes 1,500 shares of stock of Orange Corporation (basis to Raul of $600,000,fair market value on date of death of $4.1 million).The estate will incur $2.2 million of death taxes and funeral and administration expenses,and the adjusted gross estate is $9 million.Denise,Raul's daughter and sole heir of his estate,owns the remaining 500 shares of Orange Corporation's (2,000) shares outstanding.In the current year,Orange (E & P of $5 million) redeems all of the estate's 1,500 shares for $4.1 million.What are the tax consequences of the redemption to Raul's estate?

Robin Corporation distributes furniture (basis of $40,000;fair market value of $50,000) as a property dividend to its shareholders.The furniture is subject to a liability of $55,000.Robin Corporation recognizes gain of:

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

adjusted to arrive at current E & P for 2015. a.Increase b.Decrease c.No effect -Proceeds of life insurance received upon the death of a key employee (policy had no cash surrender value).

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

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?

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 $41,750. ∙ Brown incurred $18,000 in nondeductible meal and entertainment 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 domestic production activities deduction under § 199 of $1,500. ​ What is Brown's current E & P for the year?

Under certain circumstances,a distribution can generate (or add to) a deficit in E & P.

At a time when Blackbird Corporation had E & P of $700,000 and 1,000 shares of stock outstanding,the corporation distributed $300,000 to redeem 400 shares of its stock.The transaction qualified as a disproportionate redemption for the shareholder.Blackbird's E & P is reduced by $300,000 as a result of the distribution.