Question 1

In general, how are current and accumulated earnings and profits allocated to corporate distributions?

Accepted Answer

(1) Current E & P is applied first to di

Question 2

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 3

What is a constructive dividend? Provide several examples of the term.

Accepted Answer

Constructive dividends generally occur i

Question 4

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?

Accepted Answer

A)  Ellen will have $400 of qualifying dividends subject to reduced tax rates and $400 of ordinary income (from dividends paid on the short position of Marigold stock). 
B)  Tim will have $200 of qualifying dividends subject to reduced tax rates and $200 of ordinary income. 
C)  All $800 of Ellen's dividends will qualify for reduced tax rates. 
D)  All $400 of Tim's dividends will qualify for reduced tax rates. 
E)  None of the above. 
A)  Ellen will have $400 of qualifying dividends subject to reduced tax rates and $400 of ordinary income (from dividends paid on the short position of Marigold stock). 
B)  Tim will have $200 of qualifying dividends subject to reduced tax rates and $200 of ordinary income. 
C)  All $800 of Ellen's dividends will qualify for reduced tax rates. 
D)  All $400 of Tim's dividends will qualify for reduced tax rates. 
E)  None of the above.

Question 5

Rose Corporation (a calendar year taxpayer) has taxable income of $300,000, and its financial records reflect the following for the year.

Accepted Answer

The answer of Rose Corporation (a calendar year taxpayer) has...

Question 6

If there is sufficient E & P, a distribution of nonconvertible preferred stock to common shareholders is taxable.

Accepted Answer

A) True 
 B)False

Question 7

How does the definition of accumulated E & P differ from the definition of current E & P?

Accepted Answer

Accumulated E & P is the total of all pr

Question 8

No E & P adjustment is required for regular tax gains under the installment method.

Accepted Answer

A) True 
 B)False

Question 9

On January 30, Juan receives a nontaxable distribution of stock rights from Platinum Corporation. Each right entitles the holder to purchase one share of stock for $40. One right is issued for every share of stock owned. Juan owns 100 shares of stock purchased two years ago for $4,000. At the date of distribution, the rights are worth $1,000 (100 rights at $10 per right) and Juan's stock in Platinum is worth $5,000 (or $50 per share). On December 1, Juan sells all 100 stock rights for $12 per right. How much gain does Juan recognize on the sale?

Accepted Answer

A)  $1,200 
B)  $533 
C)  $400 
D)  $0 
E)  None of the above 
A)  $1,200 
B)  $533 
C)  $400 
D)  $0 
E)  None of the above

Question 10

Ten years ago, Carrie purchased 2,000 shares in Osprey Corporation for $20,000. In the current year, Carrie receives a nontaxable stock dividend of 20 shares of Osprey 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, Carrie's basis in the stock is:

Accepted Answer

A)  $20,000 in the common and $8,000 in the preferred. 
B)  $2,000 in the common and $18,000 in the preferred. 
C)  $18,000 in the common and $2,000 in the preferred. 
D)  $19,802 in the common and $198 in the preferred. 
E)  None of the above. 
A)  $20,000 in the common and $8,000 in the preferred. 
B)  $2,000 in the common and $18,000 in the preferred. 
C)  $18,000 in the common and $2,000 in the preferred. 
D)  $19,802 in the common and $198 in the preferred. 
E)  None of the above.

Question 11

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 12

Scarlet Corporation is an accrual basis, calendar year corporation. Scarlet distributes inventory (basis of $20,000; fair market value of $40,000) to Frank, its shareholder. Assuming that Scarlet has $500,000 of current E & P, what is the impact of the distribution on Scarlet Corporation and on Frank?

Accepted Answer

Scarlet's E & P is increased by the $20,

Question 13

Maria owns 75% and Christopher owns 25% of Cockatoo Corporation, a calendar year taxpayer. Cockatoo makes a $600,000 distribution to Maria on April 1 and a $200,000 distribution to Christopher on May 1. Cockatoo's current E & P is $120,000 and its accumulated E & P is $500,000. What are the tax implications of the distributions to Maria and Christopher?

Accepted Answer

Current E & P is allocated on a pro rata

Question 14

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

Accepted Answer

A)  When the basis of distributed property is greater than its fair market value, a deficit may be created in E & P. 
B)  When the basis of distributed property is less than its fair market value, the distributing corporation recognizes gain. 
C)  When the basis of distributed property is greater than its fair market value, the distributing corporation does not recognize loss. 
D)  The amount of a distribution received by a shareholder is measured by using the property's fair market value. 
E)  All of the above statements are true. 
A)  When the basis of distributed property is greater than its fair market value, a deficit may be created in E & P. 
B)  When the basis of distributed property is less than its fair market value, the distributing corporation recognizes gain. 
C)  When the basis of distributed property is greater than its fair market value, the distributing corporation does not recognize loss. 
D)  The amount of a distribution received by a shareholder is measured by using the property's fair market value. 
E)  All of the above statements are true.

Question 15

Purple Corporation makes a property distribution to its sole shareholder, Paul. The property distributed is a house (fair market value of $189,000; basis of $154,000) that is subject to a $245,000 mortgage that Paul assumes. Before considering the consequences of the distribution, Purple's current E & P is $35,000 and its accumulated E & P is $140,000. Purple makes no other distributions during the current year. What is Purple's taxable gain on the distribution of the house?

Accepted Answer

A)  $0 
B)  $21,000 
C)  $35,000 
D)  $91,000 
E)  None of the above 
A)  $0 
B)  $21,000 
C)  $35,000 
D)  $91,000 
E)  None of the above

Question 16

Jen, the sole shareholder of Mahogany Corporation, sold her stock to Jason on July 1 for $90,000. Jen's stock basis at the beginning of the year was $60,000. Mahogany made a $30,000 cash distribution to Jen immediately before the sale, while Jason received a $60,000 cash distribution from Mahogany on November 1. As of the beginning of the current year, Mahogany had $16,000 in accumulated E & P, while current E & P (before distributions) is $30,000. What are the tax consequences of these transactions to Jen and Jason?

Accepted Answer

The $30,000 in current E & P is allocate

Question 17

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 2014.
a. Increase
b. Decrease
c. No effect
-A decrease in the LIFO recapture amount during the year.

Accepted Answer

The answer of Using the legend provided, classify each statement...

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Tracy and Lance, equal shareholders in Macaw Corporation, receive $600,000 each in distributions on December 31 of the current year. Macaw's current year taxable income is $1 million and it has no accumulated E & P. Last year, Macaw sold an appreciated asset for $1,200,000 (basis of $400,000). Payment for one-half of the sale of the asset was made this year. How much of Tracy's distribution will be taxed as a dividend?

Accepted Answer

A)  $0 
B)  $300,000 
C)  $500,000 
D)  $600,000 
E)  None of the above 
A)  $0 
B)  $300,000 
C)  $500,000 
D)  $600,000 
E)  None of the above

Question 20

Puce Corporation, an accrual basis taxpayer, has struggled to survive since its formation, six years ago. As a result, it has a deficit in accumulated E & P at the beginning of the year of $340,000. This year, however, Puce earned a significant profit; taxable income was $240,000. Consequently, Puce made two cash distributions to Martha, its sole shareholder: $150,000 on July 1 and $200,000 December 31. The following information might be relevant to determining the tax treatment of the distributions.
-This year's taxable income included a net operating loss carryover of $50,000.
-The corporation's Federal income tax liability is $72,000 for the year.
-Puce paid nondeductible fines and kickbacks of $10,000. The company also paid nondeductible life insurance premiums of $22,000.
-The cash surrender value of the corporate-owned life insurance policies increased by $11,000 during the year.
-The company sold a piece of equipment during the year and reported a § 1231 gain of $105,000 and recapture income under § 1245 of $35,000. There were no other § 1231 transactions during the year, but the corporation did have a capital loss carryforward of $30,000.
-MACRS depreciation exceeds E & P depreciation by $14,000. In addition, an election under § 179 was made this year for $18,000 of assets.
a. Compute Puce's E & P for the year.
b. What are the tax consequences of the two distributions made during the year to Martha (her stock basis is $74,000)?

Accepted Answer

c. Taxable income $240,000
Net operating

In general, how are current and accumulated earnings and profits allocated to corporate distributions?

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

What is a constructive dividend? Provide several examples of the term.

Rose Corporation (a calendar year taxpayer) has taxable income of $300,000, and its financial records reflect the following for the year.

If there is sufficient E & P, a distribution of nonconvertible preferred stock to common shareholders is taxable.

How does the definition of accumulated E & P differ from the definition of current E & P?

No E & P adjustment is required for regular tax gains under the installment method.

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

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 2014. a. Increase b. Decrease c. No effect -A decrease in the LIFO recapture amount during the year.

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

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

In general, how are current and accumulated earnings and profits allocated to corporate distributions?

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

What is a constructive dividend? Provide several examples of the term.

Rose Corporation (a calendar year taxpayer) has taxable income of $300,000, and its financial records reflect the following for the year.

If there is sufficient E & P, a distribution of nonconvertible preferred stock to common shareholders is taxable.

How does the definition of accumulated E & P differ from the definition of current E & P?

No E & P adjustment is required for regular tax gains under the installment method.

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

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 2014. a. Increase b. Decrease c. No effect -A decrease in the LIFO recapture amount during the year.

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

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