Exam 19: Corporations: Distributions Not in Complete Liquidation

A distribution in excess of E & P is treated as capital gain by shareholders.

On January 2, 2012, 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, 2013, for $290,000.As a result of the sale, the adjustment to taxable income needed to arrive at current E & P is:

In applying the stock attribution rules to a stock redemption, stock owned by a shareholder who owns 65% of a corporation is deemed to be owned in full by the corporation.

Timothy owns 100% of Forsythia Corporation's stock.Corporate employees and annual salaries include Timothy ($300,000); Richard, Timothy's son ($80,000); Rita, Timothy's daughter ($100,000); and Sandy ($120,000).The operation of Forsythia Corporation is shared about equally between Timothy and Sandy (an unrelated party).Richard and Rita are full-time college students at a university about 150 miles away.Forsythia Corporation has substantial E & P but has not distributed a dividend for the past five years.Discuss problems related to the salary arrangement for Forsythia Corporation.

Five years ago, Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 1,000 shares of Blue Corporation in a transaction that qualified under § 351.The assets had a tax basis to her of $100,000 and a fair market value of $270,000 on the date of the transfer.In the current year, Blue Corporation (E & P of $800,000) redeems 250 shares from Eleanor for $220,000 in a transaction that does not qualify for sale or exchange treatment.With respect to the redemption, Eleanor will have a:

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.

Grackle Corporation (E & P of $600,000) distributes cash of $200,000 and land (fair market value of $400,000; basis of $250,000) to a shareholder in a qualifying stock redemption. The land distributed is subject to a mortgage of $460,000. Grackle will recognize a gain of $150,000 as a result of the distribution.

In the current year, Loon Corporation made a distribution in redemption of some of its shares.Loon incurred expenditures in connection with the redemption totaling $35,000 (accounting fees of $9,000, legal fees of $20,000, and brokerage fees of $6,000).The distribution was a qualifying stock redemption.How much of the $35,000 is deductible in the current year?

Pheasant Corporation, a calendar year taxpayer, has $400,000 of current E & P and a deficit in accumulated E & P of $180,000.If Pheasant pays a $600,000 distribution to its shareholders on July 1, how much dividend income do the shareholders report?

At the time of her death, Janice owned (in terms of the value of the stock outstanding) the following stock: 18% of Heron Corporation and 21% of Hawk Corporation. The value of these stocks is included in Janice's gross estate. For purposes of applying the 35% of the value of adjusted gross estate requirement under § 303 (i.e., redemption to pay death taxes), the Heron and Hawk stocks are aggregated.

The adjusted gross estate of Debra, decedent, is $8 million.Debra's estate will incur death taxes and funeral and administration expenses of $1 million.Debra's gross estate includes stock in Silver Corporation that she had purchased twelve years ago for $600,000 (date of death fair market value of $3 million).At the time of her death in 2012, Debra owned 80% of the stock in Silver Corporation.Silver Corporation (E & P of $4 million) redeems all of the estate's stock in the corporation for $3 million.Debra's will names her daughter, Dena, who owns the remaining 20% interest in Silver Corporation, as her sole heir.With respect to this redemption, Debra's estate has the following income:

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)?

Ivory Corporation (E & P of $650,000) has 1,000 shares of common stock outstanding owned by unrelated parties as follows: Veronica, 500 shares, and Tommie, 500 shares. Veronica and Tommie each paid $125 per share for the Ivory stock 12 years ago.In May of the current year, Ivory distributes securities held as an investment (basis of $140,000, fair market value of $250,000) to Veronica in redemption of 200 of her shares.

Yolanda owns 60% of the outstanding stock of Amber Corporation. In a qualifying stock redemption, Amber distributes $20,000 to Yolanda in exchange for one-half of her shares (basis of $35,000). As a result of the redemption, Yolanda has a recognized capital loss of $15,000.

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

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

Corporate shareholders generally receive less favorable tax treatment from a qualifying stock redemption than from a dividend distribution.

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?

Cash distributions received from a corporation with a positive balance in accumulated E & P at the beginning of the year will be taxed as dividend income.

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