Exam 4: Corporate Nonliquidating Distributions

Marie owns one-half of the stock of Starke Corporation and serves as its President.The remaining stock is owned by 10 investors,none of whom owns more than 10% of the outstanding shares.Marie entered a hedge agreement with the corporation three years ago about salary payments that are declared unreasonable compensation by the IRS.Two years ago,the Corporation paid Marie a salary and bonus of $500,000.The IRS subsequently held that $200,000 of the salary is unreasonable compensation.Last year,Starke Corporation and the IRS agreed that $150,000 of the compensation is,in fact,unreasonable.This year,the $150,000 is repaid by Marie to the corporation.

When appreciated property is distributed in a nonliquidating distribution,the net effect on the distributing corporation's E&P is that it is reduced by the FMV of the property distributed and increased by the gain (net of federal income taxes)recognized due to the property distribution.

Omega Corporation is formed in 2006.Its current E&P and distributions for each year through 2010 are as follows: Is the distribution made from current or accumulated E&P? At the beginning of 2011,what is accumulated E&P?

Corporations recognize gains and losses on the distribution of property to shareholders if the property's fair market value differs from its basis.

In 2010,Tru Corporation deducted $5,000 of bad debts.It received no tax benefit from the deduction because it had an NOL in 2010 that it was unable to carry back or forward.In 2011,Tru recovered $4,000 of the amount due. a)What amount must Tru include in income in 2011? b)What effect does the $4,000 have on E&P in 2011,if any?

Digger Corporation has $50,000 of current and accumulated E&P.On March 1,Digger distributes land with a $30,000 FMV and a $17,500 adjusted basis to Dave,its sole shareholder.The land is subject to a $5,000 liability which Dave assumes. a)What are the amount and character of the distribution? b)What is Dave's basis in the property? c)When does his holding period for the property begin?

Two corporations are considered to be brother-sister corporations for purposes of the Sec.304 redemption rules if one shareholder owns more than 50% of each corporation.

Identify which of the following statements is true.

Which of the following is not a condition that permits a stock redemption to be treated as a sale?

What must be reported to the IRS by corporations when nondividend distributions are made to its shareholders?

Green Corporation is a calendar-year taxpayer.All of the stock is owned by Evan.His basis for the stock is $35,000.On March 1 (of a non-leap year),Green Corporation distributes $120,000 to Evan.Determine the tax consequences of the cash distribution to Evan in each of the following independent situations:

Wills Corporation,which has accumulated a current E&P totaling $70,000,distributes land to its sole shareholder,an individual.The land has an FMV of $75,000 and an adjusted basis of $60,000.The shareholder assumes a $15,000 liability associated with the land.The transaction will have the following tax consequences.

Maple Corporation distributes land to a noncorporate shareholder.Explain how the following items are computed: a)the amount of the distribution. b)the amount of the dividend. c)the basis of the land to the shareholder. d)the start of the holding period for the land. How would your answers change if the distribution was made to a corporate shareholder?

What are the consequences of a stock redemption to the distributing corporation?

Identify which of the following statements is true.

Rich owns 60 of the 100 outstanding shares of Rainbow Corporation's stock and 80 of the 100 outstanding shares of Oz Corporation's stock.Rich's basis in his Rainbow shares is $12,000,and his basis in his Oz shares is $8,000.Rich sells 30 of his Rainbow shares to Oz Corporation for $50,000.At the end of the year of the sale,Rainbow and Oz Corporations have E&Ps of $25,000 and $40,000,respectively. a)What is the amount and character of Rich's gain or loss? b)What is Rich's basis in his remaining shares of the Rainbow and Oz stock? c)How does the sale affect the E&Ps of Rainbow and Oz Corporations? d)What basis does Oz Corporation take in the Rainbow shares it purchases? e)How would your answer to part (a)change if Rich owns only 50 shares of the 100 outstanding shares of Oz Stock?

What is a stock redemption? What are some of the reasons for making a stock redemption? Why are some redemptions treated as sales and others as dividends?

Splash Corporation has $50,000 of taxable income before any charitable contribution deduction.Splash contributed $20,000 to a qualified charitable organization.Due to the 10% of taxable income limitation on charitable contribution deductions,Splash's contribution deduction is limited to $5,000.What effect does the charitable contribution have on current and future E&P?

Circle Corporation has 1,000 shares of common stock outstanding.Circle redeems 450 shares owned by Dennis for $75,000 in complete redemption of Dennis's interest.The redemption qualifies as a sale.When the redemption is made,Circle Corporation has $150,000 of current and accumulated E&P and paid-in capital of $50,000.The distribution reduces paid-in capital by

On April 1,Delta Corporation distributes $120,000 in cash to each of its two equal shareholders,Sarah and Matt.At the time of the distribution,Delta's E&P is $160,000.Sarah's basis in her stock is $50,000 and Matt's basis in his stock is $20,000.How are the distributions characterized to Sarah and Matt? Be specific.