Exam 19: Corporations: Distributions Not in Complete Liquidation

Sam's gross estate includes stock in Tern Corporation and Wren Corporation, valued at $1.4 million and $980,000, respectively.At the time of Sam's death in 2012, the stock represented 22% of Tern's outstanding stock and 27% of Wren's outstanding stock.Sam's adjusted gross estate equals $6,500,000.Death taxes and funeral and administration expenses for Sam's estate total $980,000.Sam had a basis of $350,000 in the Tern stock and $190,000 in the Wren stock at the time of his death.None of the beneficiaries of Sam's estate own (directly or indirectly) any stock in Tern Corporation, but some of the beneficiaries own stock of Wren Corporation.Consider the following independent questions.

Brown Corporation, an accrual basis corporation, has taxable income of $150,000 in the current year.Included in its determination of taxable income are the following transactions. What is Brown's current E & P for the year?

Constructive dividends have no effect on a distributing corporation's E & P.

Puffin Corporation's 2,000 shares outstanding are owned as follows: Paul, 800 shares; Sandra (Paul's sister), 800 shares; and Greta (Paul's granddaughter), 400 shares.During the current year, Puffin (E & P of $1 million) redeemed 600 shares of Paul's stock for $100,000.If Paul had acquired the 600 shares five years ago for $30,000, he will have a long-term capital gain of $70,000 from the redemption.

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?

Ember Corporation has 500 shares of stock outstanding: Zoe owns 170 shares, Leticia owns 95 shares, and Samuel owns 55 shares.Sage Partnership owns the other 180 shares in Ember Corporation.Zoe, Leticia, and Samuel, all unrelated, are equal partners of the Sage Partnership. In applying the stock attribution rules under § 318:

As a result of a redemption, a shareholder's interest (direct and indirect) in the corporation decreased from 58% to 45%. The redemption qualifies for sale or exchange treatment as a disproportionate redemption.

During the current year, Goose Corporation sold equipment for $500,000 (adjusted basis of $260,000).The equipment was purchased a few years ago for $560,000 and $300,000 in MACRS deductions have been claimed.ADS depreciation would have been $200,000.As a result of the sale, the adjustment to taxable income needed to determine current E & P is:

Canary Corporation has 1,000 shares of stock outstanding.It redeems in a qualifying stock redemption 350 shares for $400,000 at a time when it has paid-in capital of $100,000 and E & P of $1 million.What would be the charge to Canary's E & P as a result of the redemption?

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

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

To carry out a qualifying stock redemption, Turaco Corporation (E & P of $800,000) transfers land held for investment purposes to Aida, a shareholder. The land had a basis of $250,000, a fair market value of $400,000, and is subject to a $300,000 liability. Aida has a basis of $70,000 in the shares redeemed. Which of the following is a correct statement regarding the tax consequences of this redemption?

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

When current E & P has a deficit and accumulated E & P is positive, the two accounts are netted at the date of the distribution. If a positive balance results, the distribution is a dividend to the extent of the balance.

Finch Corporation (E & P of $400,000) distributed machinery ($10,000 adjusted basis, $150,000 fair market value) to its sole shareholder, Kathleen.The property is subject to a $50,000 mortgage, which Kathleen assumed.How much dividend income does Kathleen recognize as a result of the distribution and what is her basis in the machinery?

Julian, Berta, and Maria own 400 shares, 400 shares, and 200 shares, respectively, in Caramel Corporation (E & P of $750,000).Berta is Julian's sister, and Maria is Julian's aunt.Caramel Corporation redeems all of Julian's stock for $420,000.Julian paid $200 a share for the stock five years ago.Julian continued to serve on Caramel's board of directors after the redemption.With respect to the redemption:

Kite Corporation has 1,000 shares of stock outstanding. Kent owns 300 shares, Kent's father owns 200 shares, Kent's daughter owns 100 shares, and Kent's aunt owns 200 shares. Plover Corporation owns the other 200 shares in Kite Corporation. Kent owns 75% of the stock in Plover Corporation. Applying the § 318 stock attribution rules, how many shares does Kent own in Kite Corporation?

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.

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?

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?