Exam 5: Corporations: Earnings Profits and Dividend Distributions

Thistle Corporation declares a nontaxable dividend payable in rights to subscribe to common stock. One right and $25 entitle the holder to subscribe to one share of stock. One right is issued for each share of stock held. Annette, a shareholder, owns 200 shares of stock that she purchased five years ago for $3,000. At the date of distribution of the rights, the market values were $50 per share for the stock and $25 for a right. Annette received 200 rights. She exercises 160 rights and purchases 160 additional shares of stock. She sells the remaining 40 rights for $1,080. What are the tax consequences to Annette?

Dividends taxed as ordinary income are considered investment income for purposes of the investment interest expense limitation.

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

Gander, a calendar year corporation, has a deficit in current E & P of $100,000 and a $290,000 positive balance in accumulated E & P. If Gander determines that a $500,000 distribution to its shareholders is appropriate at some point during the year, what is the maximum amount of the distribution that could potentially be treated as a dividend?

Glenda is the sole shareholder of Condor Corporation. She sold her stock to Melissa on October 31 for $150,000. Glenda's basis in Condor stock was $50,000 at the start of the year. Condor distributed land to Glenda immediately before the sale. Condor's basis in the land was $20,000 (fair market value of $25,000). On December 31, Melissa received a $75,000 cash distribution from Condor. During the year, Condor has $20,000 of current E & P and its accumulated E & P balance on January 1 is $10,000. Which of the following statements is true?

When computing E & P, taxable income is not adjusted for additional first-year depreciation.

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?

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

Falcon Corporation has $200,000 of current E & P and a deficit in accumulated E & P of $90,000. If Swan pays a $300,000 distribution to its shareholders on July 1, how much dividend income do the shareholders report?

Scarlet Corporation (a calendar year taxpayer) has taxable income of $150,000, and its financial records reflect the following for the year. Scarlet Corporation's current E & P is:

Corporate distributions are presumed to be paid out of E & P and are treated as dividends unless the parties to the transaction can show otherwise.

Platinum Corporation, a calendar year taxpayer, has taxable income of $500,000. Among its transactions for the year are the following: Disregarding any provision for Federal income taxes, Platinum Corporation's current E & P is:

Ashley and Andrew, equal shareholders in Parrot Corporation, receive $250,000 each in distributions on December 31 of the current year. During the current year, Parrot sold an appreciated asset for $500,000 (basis of $150,000). Payment for the sale of the asset will be made as follows: 50% next year and 50% in the following year, with interest payable at a rate of 7.5%. Before considering the effect of the asset sale, Parrot's current year E & P is $400,000 and it has no accumulated E & P. How much of Ashley's distribution will be taxed as a dividend?

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

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

To determine E & P, some (but not all) previously excluded income items are added back to taxable income.

Swan Corporation makes a property distribution to its sole shareholder, Matthew. The property distributed is a cottage (fair market value of $135,000; basis of $110,000) that is subject to a $175,000 mortgage that Matthew assumes. Before considering the consequences of the distribution, Swan's current E & P is $25,000 and its accumulated E & P is 100,000. Swan makes no other distributions during the current year. What is Swan's taxable gain on the distribution of the cottage?

Jose receives a nontaxable distribution of stock rights during the year from Gold Corporation on January 30. Each right entitles the holder to purchase one share of stock for $50. One right is issued for every share of stock owned. Jose owns 100 shares of stock purchased two years ago for $5,000. At the date of distribution, the rights are worth $1,000 (100 rights at $10 per right) and Jose's stock in Gold is worth $6,000 (or $60 per share). On December 1, Jose sells all stock rights for $13 per right. How much gain does Jose recognize on the sale?

On January 1, Gull Corporation (a calendar year taxpayer) has accumulated E & P of $200,000. During the year, Gull incurs a net loss of $280,000 from operations that accrues ratably. On June 30, Gull distributes $120,000 to Sharon, its sole shareholder, who has a basis in her stock of $75,000. How much of the $120,000 is a dividend to Sharon?