Exam 5: Corporations: Earnings Profits and Dividend Distributions

Samantha owns stock in Pigeon Corporation (basis of $80,000) as an investment. Pigeon distributes property (fair market value of $300,000; basis of $150,000) to her during the year. Pigeon has current E & P of $20,000 and accumulated E & P of $80,000 and makes no other distributions during the year. What is Samantha's capital gain on the distribution?

Which one of the following statements is false?

Constructive dividends do not need to satisfy the legal requirements for a dividend as set forth by applicable state law.

Ten years ago, Connie purchased 4,000 shares in Platinum Corporation for $40,000. In the current year, Connie receives a nontaxable stock dividend of 40 shares of Platinum preferred. Values at the time of the dividend are: $8,000 for the preferred stock and $72,000 for the common. Based on this information, Connie's basis is:

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

A realized gain from an involuntary conversion under § 1033 that is not recognized for income tax purposes has no effect on E & P.

Gold Corporation has accumulated E & P of $2 million as of January 1 of the current year. During the year, it expects to have earnings from operations of $1,680,000 and to distribute $900,000 in cash to shareholders. Gold Corporation also expects to sell an asset for a loss of $2 million. Thus, it anticipates incurring a deficit of $320,000 for the year. What can Gold do to minimize the amount of dividend income to its shareholders?

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

Which one of the following statements about property distributions is false?

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.

In certain circumstances, the amount of dividend income recognized by a shareholder from a property distribution is not reduced by the amount of liability assumed by a shareholder.

If a distribution of stock rights is taxable and their fair market value is less than 15 percent of the value of the old stock, then either a zero basis or a portion of the old stock basis may be assigned to the rights, at the shareholder's option.

In June of the current year, Marigold Corporation declares a $4 dividend out of E & P on each share of common stock to shareholders of record on August 1. Ellen and Tim each purchase 100 shares of Marigold stock on July 1. On July 15, Ellen also purchases a short position in Marigold. Tim sells 50 of his shares on August 10 and continues to hold the remaining 50 shares through the end of the year. Ellen closes her short position in Marigold on October 15. With respect to the dividends, which of the following is correct?

Purple Corporation has accumulated E & P of $100,000 on January 1, 2011. In 2011, Purple has current E & P of $130,000 (before any distribution). On December 31, 2011, the corporation distributes $250,000 to its sole shareholder, Cindy (an individual). Purple Corporation's E & P as of January 1, 2012 is:

On January 2, 2011, 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, 2012, for $290,000. As a result of the sale, the adjustment to taxable income needed to arrive at current E & P is:

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

Duck Corporation is a calendar year taxpayer formed in 2005. Duck's E & P for each of the past 5 years is listed below. 2010 $280,000 2009 $400,000 2008 $390,000 2007 $680,000 2006 $160,000 Duck Corporation made the following distributions in the previous 5 years. 2009 Land (basis of $700,000, fair market value of $800,000) 2006 $200,000 cash Duck's accumulated E & P as of January 1, 2011 is:

When current E & P is positive and accumulated E & P has a deficit balance, the two accounts are netted for dividend determination purposes.

If stock rights are taxable, the recipient has income to the extent of the fair market value of the rights.

Regardless of any deficit in current E & P, distributions during the year are taxed as dividends to the extent of accumulated E & P.