Question 1

When computing current E & P, taxable income is not adjusted for the deferred gain in a § 1031 like-kind exchange.

Accepted Answer

A) True 
 B)False

Question 2

Navy Corporation makes a property distribution to its sole shareholder, Troy. The property distributed is a car (fair market value of $10,000; basis of $15,000) that is subject to a $2,000 liability which Troy assumes. Navy makes no other distributions during the current year. Navy has no accumulated E & P and $15,000 of current E & P from other sources during the year. What is Navy's E & P after taking into account the distribution of the car?

Accepted Answer

A)  $2,000. 
B)  $3,000. 
C)  $5,000. 
D)  $7,000. 
E)  None of the above. 
A)  $2,000. 
B)  $3,000. 
C)  $5,000. 
D)  $7,000. 
E)  None of the above.

Question 3

Stephanie is the sole shareholder and president of Hawk Corporation. She feels that she can justify at least a $220,000 bonus this year because of her performance. However, rather than a bonus in the form of a salary, she plans to have Hawk pay her a $220,000 dividend. Because Stephanie's marginal tax rate is 35%, she prefers to receive a dividend taxed at 15%. Her accountant, however, suggests a $310,000 bonus in lieu of the $220,000 dividend since Hawk Corporation is in the 34% tax bracket. Should Stephanie take the $220,000 dividend or the $310,000 bonus? Support your answer by computing the after-tax cost of the two alternatives to Hawk and to Stephanie.

Accepted Answer

Stephanie should choose the $310,000 bon

Question 4

Distributions that are not dividends are a return of capital and decrease the shareholder's basis. Once basis is reduced to zero, any excess is taxed as a capital gain.

Accepted Answer

A) True 
 B)False

Question 5

Dividends paid to shareholders who hold both long and short positions do not qualify for the reduced tax rate available to individuals in certain years.

Accepted Answer

A) True 
 B)False

Question 6

An increase in the LIFO recapture amount must be added to taxable income to determine E & P.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements regarding constructive dividends is not correct?

Accepted Answer

A)  Constructive dividends do not need to be formally declared or designated as a dividend. 
B)  Constructive dividends need not be paid pro rata to the shareholders. 
C)  Corporations that receive constructive dividends may not use the dividends received deduction. 
D)  Constructive dividends are taxable as dividends only to the extent of earnings and profits. 
E)  All of the above. 
A)  Constructive dividends do not need to be formally declared or designated as a dividend. 
B)  Constructive dividends need not be paid pro rata to the shareholders. 
C)  Corporations that receive constructive dividends may not use the dividends received deduction. 
D)  Constructive dividends are taxable as dividends only to the extent of earnings and profits. 
E)  All of the above.

Question 8

During the year, Blue Corporation distributes land to its sole shareholder. If the fair market value of the land is less than its adjusted basis, Blue will recognize a loss on the distribution.

Accepted Answer

A) True 
 B)False

Question 9

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.

Accepted Answer

The answer of Daisy Corporation is the sole shareholder of...

Question 10

A corporation that distributes a property dividend must reduce its E & P by the adjusted basis of the property less any liability on the property.

Accepted Answer

A) True 
 B)False

Question 11

Rust Corporation has accumulated E & P of $30,000 on January 1, 2011. In 2011, Rust Corporation had an operating loss of $40,000. It distributed cash of $20,000 to Andre, its sole shareholder, on December 31, 2011. Rust Corporation's balance in its E & P account as of January 1, 2012, is:

Accepted Answer

A)  $30,000 deficit. 
B)  $10,000 deficit. 
C)  $0. 
D)  $30,000. 
E)  None of the above. 
A)  $30,000 deficit. 
B)  $10,000 deficit. 
C)  $0. 
D)  $30,000. 
E)  None of the above.

Question 12

On January 1, Tulip Corporation (a calendar year taxpayer) has accumulated E & P of $300,000. Its current E & P for the year is $90,000 (before considering dividend distributions). During the year, Tulip distributes $600,000 ($300,000 each) to its equal shareholders, Anne and Tom. Anne has a basis in her stock of $65,000, while Tom's basis is $120,000. What is the effect of the distribution by Tulip Corporation on Anne and Tom?

Accepted Answer

Anne and Tom each have dividend income o

Question 13

The dividends received deduction is added back to taxable income to determine E & P.

Accepted Answer

A) True 
 B)False

Question 14

When computing E & P, an adjustment to taxable income is necessary for any domestic production activities deduction.

Accepted Answer

A) True 
 B)False

Question 15

Briefly describe the reason a corporation might distribute a property dividend to a shareholder in lieu of a cash distribution. Describe the tax effects of the property distribution on the shareholder and on the corporation.

Accepted Answer

A corporation could distribute property

Question 16

If a stock dividend is taxable, the shareholder's basis in the newly received shares is equal to the fair market value of the shares received in the distribution.

Accepted Answer

The answer of If a stock dividend is taxable, the...

Question 17

Any loss in current E & P must be treated as occurring ratably during the year.

Accepted Answer

A) True 
 B)False

Question 18

Pink Corporation declares a nontaxable dividend payable in rights to subscribe to common stock. Each right entitles the holder to purchase one share of stock for $25. One right is issued for every two shares of stock owned. Jack owns 100 shares of stock in Pink, which he purchased three years ago for $3,000. At the time of the distribution, the value of the stock is $45 per share and the value of the rights is $2 per share. Jack receives 50 rights. He exercises 25 rights and sells the remaining 25 rights three months later for $2.50 per right.

Accepted Answer

A)  Jack must allocate a part of the basis of his original stock in Pink to the rights. 
B)  If Jack does not allocate a part of the basis of his original stock to the rights, his basis in the new stock is zero. 
C)  Sale of the rights produces ordinary income to Jack of $62.50. 
D)  If Jack does not allocate a part of the basis of his original stock to the rights, his basis in the new stock is $625. 
E)  None of the above. 
A)  Jack must allocate a part of the basis of his original stock in Pink to the rights. 
B)  If Jack does not allocate a part of the basis of his original stock to the rights, his basis in the new stock is zero. 
C)  Sale of the rights produces ordinary income to Jack of $62.50. 
D)  If Jack does not allocate a part of the basis of his original stock to the rights, his basis in the new stock is $625. 
E)  None of the above.

Question 19

Tangelo Corporation has an August 31 year-end. Tangelo had $50,000 in accumulated E & P at the beginning of its 2012 fiscal year (September 1, 2011) and during the year, it incurred a $75,000 operating loss. It also distributed $65,000 to its sole shareholder, Cass, on November 30, 2011. If Cass is a calendar year taxpayer, how should she treat the distribution when she files her 2011 income tax return (assuming the return is filed by April 15, 2012)?

Accepted Answer

A)  $65,000 of dividend income. 
B)  $60,000 of dividend income and $5,000 recovery of capital. 
C)  $50,000 of dividend income and $15,000 recovery of capital. 
D)  The distribution has no effect on Cass in the current year. 
E)  None of the above. 
A)  $65,000 of dividend income. 
B)  $60,000 of dividend income and $5,000 recovery of capital. 
C)  $50,000 of dividend income and $15,000 recovery of capital. 
D)  The distribution has no effect on Cass in the current year. 
E)  None of the above.

Question 20

Use of MACRS cost recovery when computing taxable income does not require an E & P adjustment.

Accepted Answer

A) True 
 B)False

When computing current E & P, taxable income is not adjusted for the deferred gain in a § 1031 like-kind exchange.

Distributions that are not dividends are a return of capital and decrease the shareholder's basis. Once basis is reduced to zero, any excess is taxed as a capital gain.

Dividends paid to shareholders who hold both long and short positions do not qualify for the reduced tax rate available to individuals in certain years.

An increase in the LIFO recapture amount must be added to taxable income to determine E & P.

Which of the following statements regarding constructive dividends is not correct?

During the year, Blue Corporation distributes land to its sole shareholder. If the fair market value of the land is less than its adjusted basis, Blue will recognize a loss on the distribution.

A corporation that distributes a property dividend must reduce its E & P by the adjusted basis of the property less any liability on the property.

Rust Corporation has accumulated E & P of $30,000 on January 1, 2011. In 2011, Rust Corporation had an operating loss of $40,000. It distributed cash of $20,000 to Andre, its sole shareholder, on December 31, 2011. Rust Corporation's balance in its E & P account as of January 1, 2012, is:

The dividends received deduction is added back to taxable income to determine E & P.

When computing E & P, an adjustment to taxable income is necessary for any domestic production activities deduction.

Briefly describe the reason a corporation might distribute a property dividend to a shareholder in lieu of a cash distribution. Describe the tax effects of the property distribution on the shareholder and on the corporation.

If a stock dividend is taxable, the shareholder's basis in the newly received shares is equal to the fair market value of the shares received in the distribution.

Any loss in current E & P must be treated as occurring ratably during the year.

Use of MACRS cost recovery when computing taxable income does not require an E & P adjustment.

Understanding and Working With the Federal Tax Law

Corporations: Introduction and Operating Rules

Corporations: Special Situations

Corporations: Organization and Capital Structure

Corporations: Redemptions and Liquidations

Corporations: Reorganizations

Consolidated Tax Returns

Taxation of International Transactions

Partnerships: Formation, Operation, and Basis

Partnerships: Distributions, Transfer of Interests, and Terminations

S: Corporations

Comparative Forms of Doing Business

Taxes on the Financial Statements

Exempt Entities

Multistate Corporate Taxation

Tax Practice and Ethics

The Federal Gift and Estate Taxes

Family Tax Planning

Income Taxation of Trusts and Estates

Filters

Exam 5: Corporations: Earnings Profits and Dividend Distributions

When computing current E & P, taxable income is not adjusted for the deferred gain in a § 1031 like-kind exchange.

Distributions that are not dividends are a return of capital and decrease the shareholder's basis. Once basis is reduced to zero, any excess is taxed as a capital gain.

Dividends paid to shareholders who hold both long and short positions do not qualify for the reduced tax rate available to individuals in certain years.

An increase in the LIFO recapture amount must be added to taxable income to determine E & P.

Which of the following statements regarding constructive dividends is not correct?

During the year, Blue Corporation distributes land to its sole shareholder. If the fair market value of the land is less than its adjusted basis, Blue will recognize a loss on the distribution.

A corporation that distributes a property dividend must reduce its E & P by the adjusted basis of the property less any liability on the property.

Rust Corporation has accumulated E & P of $30,000 on January 1, 2011. In 2011, Rust Corporation had an operating loss of $40,000. It distributed cash of $20,000 to Andre, its sole shareholder, on December 31, 2011. Rust Corporation's balance in its E & P account as of January 1, 2012, is:

The dividends received deduction is added back to taxable income to determine E & P.

When computing E & P, an adjustment to taxable income is necessary for any domestic production activities deduction.

Briefly describe the reason a corporation might distribute a property dividend to a shareholder in lieu of a cash distribution. Describe the tax effects of the property distribution on the shareholder and on the corporation.

If a stock dividend is taxable, the shareholder's basis in the newly received shares is equal to the fair market value of the shares received in the distribution.

Any loss in current E & P must be treated as occurring ratably during the year.

Use of MACRS cost recovery when computing taxable income does not require an E & P adjustment.

Understanding and Working With the Federal Tax Law

Corporations: Introduction and Operating Rules

Corporations: Special Situations

Corporations: Organization and Capital Structure

Corporations: Redemptions and Liquidations

Corporations: Reorganizations

Consolidated Tax Returns

Taxation of International Transactions

Partnerships: Formation, Operation, and Basis

Partnerships: Distributions, Transfer of Interests, and Terminations

S: Corporations

Comparative Forms of Doing Business

Taxes on the Financial Statements

Exempt Entities

Multistate Corporate Taxation

Tax Practice and Ethics

The Federal Gift and Estate Taxes

Family Tax Planning

Income Taxation of Trusts and Estates

Filters