Exam 19: Corporations: Distributions Not in Complete Liquidation

On January 1,Gull Corporation (a calendar year taxpayer)has accumulated E & P of $200,000.During the year,Gull incurs a net loss of $280,000 from operations that accrues ratably.On June 30,Gull distributes $120,000 to Sharon,its sole shareholder,who has a basis in her stock of $75,000.How much of the $120,000 is a dividend to Sharon?

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

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?

All of the stock in Robin Corporation (E & P of $800,000)is held by three unrelated individuals as follows: Shontelle has 300 shares,Marta has 200 shares,and Diego owns 500 shares.Robin Corporation redeems 200 of Diego's shares (basis of $10,000)for $40,000.If Diego's stock is a capital asset that has been held for the requisite holding period,he has a long-term capital gain of $30,000.

The rules used to determine the taxability of stock dividends also apply to distributions of stock rights.

Cash distributions received from a corporation with a deficit balance in accumulated E & P at the beginning of the year will not be taxed as dividend income.

Noncorporate shareholders generally prefer a nonqualified stock redemption over a qualifying stock redemption due to the availability of the dividends received deduction.

In the current year,Pink Corporation has a § 179 expense of $80,000.As a result,next year,taxable income must be decreased by $16,000 to determine current E & P.

Hummingbird Corporation has 1,000 shares of common stock outstanding owned by unrelated parties as follows: Juan,300 shares,Erika,300 shares,and Dalissa,400 shares.Each of the three shareholders paid $75 per share for the Hummingbird stock 10 years ago.Hummingbird has $800,000 of accumulated E & P and $40,000 of current E & P.In January of the current year,Hummingbird distributes land held as an investment (adjusted basis of $260,000,fair market value of $220,000)to Dalissa in redemption of all 400 of her shares.In December of the current year,Hummingbird distributes securities held as an investment (adjusted basis of $90,000,fair market value of $110,000)to Erika in redemption of 200 of her shares.

Rosie,the sole shareholder of Eagle Corporation,has a stock basis of $100,000 at the beginning of the year.On July 1,she sells all of her stock to Manuel for $500,000.On January 1,Eagle has accumulated E & P of $45,000 and during the year,current E & P of $80,000.Eagle makes the following cash distributions: $90,000 to Rosie on March 31 and $90,000 to Manuel on November 1.How are the distributions taxed to Rosie and Manuel? What is Rosie's recognized gain on the sale to Manuel?

In general,a nonqualified stock redemption is denied sale or exchange treatment because the shareholder's ownership interest in the corporation is not sufficiently diminished as result of the redemption.

Federal income tax paid in the current year must be added back to taxable income to determine E & P.

Dividends are always taxed as ordinary income.

At the beginning of the current year,Dan and Andy each own 50% of Swallow Corporation.In July,Dan sold his stock to Kim for $140,000.At the beginning of the year,Swallow Corporation had accumulated E & P of $240,000 and its current E & P is $280,000 (prior to any distributions).Swallow distributed $300,000 on March 10 ($150,000 to Dan and $150,000 to Andy)and distributed another $300,000 on October 1 ($150,000 to Kim and $150,000 to Andy).Kim has dividend income of:

A realized gain from a like-kind exchange under § 1031 that is not recognized for income tax purposes has no effect on E & P.

In the current year,Verdigris Corporation (with E & P of $250,000)made the following property distributions to its shareholders (all corporations): Verdigris Corporation is not a member of a controlled group.As a result of the distribution:

In applying the stock attribution rules to a stock redemption,a shareholder is treated as owning the stock of the following family members: spouses,children,grandchildren,siblings,and parents.

The adjusted gross estate of Keith,decedent,is $5 million.Included in the gross estate is stock in Gold Corporation (E & P of $900,000),a closely held corporation,valued at $1.8 million as of the date of Keith's death in 2009.Keith had acquired the stock twelve years ago at a cost of $300,000.Death taxes and funeral and administration expenses for Keith's estate are $900,000.Gold Corporation redeems one-half of the stock from Keith's estate in a § 303 redemption to pay death taxes using property with a fair market value of $900,000 (adjusted basis of $550,000).Which of the following is a correct statement regarding the tax consequences of this redemption?

Yellow Corporation transfers land (basis of $210,000,fair market value of $300,000)to Joe,a shareholder,to carry out a qualifying stock redemption.The land is distributed subject to a $320,000 liability.With respect to the redemption:

Tracy and Lance,equal shareholders in Macaw Corporation,receive $250,000 each in distributions on December 31 of the current year.During the current year,Macaw sold an appreciated asset for $500,000 (basis of $150,000).Payment for the sale of the asset will be made as follows: 50% next year and 50% in the following year,with interest payable at a rate of 7.5%.Before considering the effect of the asset sale,Macaw's current year E & P is $400,000 and it has no accumulated E & P.How much of Tracy's distribution will be taxed as a dividend?