Exam 5: Corporations: Earnings and Profits and Dividend Distributions

Any distribution in excess of E & P is treated as a tax-free recovery of capital by shareholders.

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 2008. a.Increase b.Decrease c.No effect -Gain realized,but not recognized,on involuntary conversion in 2008.

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to determine current E & P for 2008. a.Increase b.Decrease c.No effect -Nontaxable stock dividend distributed to shareholders.

A pro rata distribution of nonconvertible preferred stock to common shareholders is not generally taxable.

Property distributed by a corporation as a dividend is subject to a liability in excess of its basis.For purposes of determining gain on the distribution,the basis of the property is treated as being not less than the amount of liability.

Of the § 179 expense deducted in the current year,80% must be added to this year's taxable income to determine current E & P.

At the beginning of the current year,Paul and Yong each own 50% of Sparrow Corporation.In July,Paul sold his stock to Sarah for $110,000.At the beginning of the year,Sparrow Corporation had accumulated E & P of $200,000 and its current E & P is $240,000 (prior to any distributions).Sparrow distributed $260,000 on March 10 ($130,000 to Paul and $130,000 to Yong)and distributed another $260,000 on October 1 ($130,000 to Sarah and $130,000 to Yong).Sarah has dividend income of:

On January 1,Tanager Corporation (a calendar year taxpayer)has accumulated E & P of $190,000.During the year,Tanager incurs a net loss of $240,000 from operations that accrues ratably.On June 30,Tanager distributes $100,000 to Sharisa,its sole shareholder,who has a basis in her stock of $40,000.How much of the $100,000 is a dividend to Sharisa?

The amount of dividend income recognized by a shareholder from a property distribution is always reduced by the amount of liabilities assumed by the shareholder.

Nondeductible meal and entertainment expenses must be subtracted from taxable income to determine current E & P.

In the current year,Pink Corporation has a § 179 expense of $80,000.As a result,next year,taxable income must be decreased by $16,000 to determine current E & P.

A corporation borrows money to purchase State of Wisconsin bonds.The interest on the loan has no effect on either taxable income or current E & P.

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

If a stock dividend is taxable,the shareholder's basis of the newly received shares is determined by reallocating the basis of the previously owned stock.

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to determine current E & P for 2008. 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).

Lark Corporation is the sole shareholder of Plover Corporation,which it hopes to sell within the next three years.The Plover stock (basis of $27 million)is currently worth $30 million,but Lark believes that it would be easier to find a buyer if it was worth less.To lower the value of its stock,Plover distributes $2 million cash to Lark (sufficient E & P exists to cover the distribution).At a later date,Lark sells Plover for $28 million. a.What are the tax consequences to Lark on the sale? b.What would be the tax consequences if Plover had not first distributed the $2 million in cash and Lark sold the Plover stock for $30 million?

When a corporation makes an installment sale,for E & P purposes the realized gain is recognized as payments are received.

Tangerine Corporation,a calendar year taxpayer,has taxable income of $400,000.Among its transactions for the year are the following: Disregarding any provision for Federal income taxes,the effect of these transactions on Tangerine Corporation's current E & P is:

Silver Corporation has accumulated E & P of $1,000,000 as of January 1 of the current year.During the year,it expects to have earnings from operations of $840,000 and to make a cash distribution of $450,000.Silver Corporation also expects to sell an asset for a loss of $1,000,000.Thus,it anticipates incurring a deficit of $160,000 for the year.What can Silver do to minimize the amount of dividend income to its shareholders?

Pink,Corporation,a calendar year taxpayer,made quarterly estimated tax payments of $300 each quarter in 2008,for a total of $1,200.Pink filed its 2008 tax return in 2009 and the return showed a tax liability for 2008 of $1,600.At the time of filing,March 15,2009,Pink paid an additional $400 in Federal income taxes.How does the additional payment of $400 impact Pink's E & P?