Exam 19: Corporations: Distributions Not in Complete Liquidation

On January 1,Cotton Candy Corporation (a calendar year taxpayer)has accumulated E & P of $400,000.Its current E & P for the year is $120,000 (before considering dividend distributions).During the year,Cotton Candy distributes $800,000 ($400,000 each)to its equal shareholders,Mary and Larry.Mary has a basis in her stock of $95,000,while Larry's basis is $160,000.What is the effect of the distribution by Cotton Candy Corporation on Mary and Larry?

Betty's adjusted gross estate is $7 million.The death taxes and funeral and administration expenses of her estate total $800,000.Included in Betty's gross estate is stock in Heron Corporation,valued at $2.1 million as of the date of her death in 2009.Betty had acquired the stock six years ago at a cost of $410,000.If Heron Corporation redeems $800,000 of Heron stock from the estate,the transaction will qualify under § 303 as a redemption to pay death taxes and receive sale or exchange treatment.

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:

Rust Corporation has accumulated E & P of $30,000 on January 1,2010.In 2010,Rust Corporation had an operating loss of $40,000.It distributed cash of $20,000 to Andre,its sole shareholder,on December 31,2010.Rust Corporation's balance in its E & P account as of January 1,2011,is:

The gross estate of Raul,decedent who died in 2009,includes 700 shares of stock of Orange Corporation (basis to Raul of $400,000,fair market value on date of death of $3 million).The estate will incur $2 million of death taxes and funeral and administration expenses,and the adjusted gross estate is $8 million.Denise,Raul's daughter and sole heir of his estate,owns the remaining 300 shares of Orange Corporation's (1,000)shares outstanding.In the current year,Orange (E & P of $4 million)redeems all of the estate's 700 shares for $3 million.What are the tax consequences of the redemption to Raul's estate?

Under no circumstances can a distribution generate (or add to)a deficit in E & P.

Green Corporation has accumulated E & P of $50,000 on January 1,2010.In 2010,Green has current E & P of $65,000 (before any distribution).On December 31,2010,the corporation distributes $125,000 to its sole shareholder,Maxwell (an individual).Green Corporation's E & P as of January 1,2011 is:

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.

During the current year,Gander Corporation sold equipment for $250,000 (adjusted basis of $130,000).The equipment was purchased a few years ago for $280,000 and $150,000 in MACRS deductions have been claimed.ADS depreciation would have been $100,000.As a result of the sale,the adjustment to taxable income needed to determine E & P is:

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

For a stock redemption to qualify for sale or exchange treatment under § 303 (redemption to pay death taxes),it need not satisfy any of the § 302 redemption provisions.

Carol,Bonnie,and Ann,sisters,own 300 shares,300 shares,and 400 shares,respectively,in Teal Corporation (E & P of $600,000).Teal Corporation redeems all of Ann's stock for $250,000.Ann paid $100 a share for the stock five years ago.Ann continued to serve as president of Teal after the redemption.With respect to the redemption:

To determine E & P,some (but not all)previously excluded income items are added back to taxable income.

At a time when Blackbird Corporation had E & P of $950,000 and 1,000 shares of stock outstanding,the corporation distributed $250,000 to redeem 300 shares of its stock.The transaction qualified as a disproportionate redemption for the shareholder.Blackbird's E & P is reduced by $285,000 as a result of the distribution.

Mallard Corporation is a calendar year taxpayer formed in 20019- Mallard's E & P for each of the past 5 years is listed below. 2009 $140,000 2008 $200,000 2007 $195,000 2006 $340,000 2005 $ 80,000 Mallard Corporation made the following distributions in the previous 5 years. 2008 Land (basis of $350,000,fair market value of $400,000) 2005 $100,000 cash Mallard's accumulated E & P as of January 1,2010 is:

Briefly describe the reason a corporation might distribute a property dividend to a shareholder in lieu of a cash distribution.Describe the tax effects of the property distribution on the shareholder and on the corporation.

The amount of dividend income recognized by a shareholder from a property distribution is always reduced by the amount of liabilities assumed by the shareholder.

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 $300,000 and a fair market value of $450,000 on the date of the transfer.In the current year,Blue Corporation (E & P of $600,000)redeems 200 shares from Eleanor for $190,000 in a transaction that qualifies for sale or exchange treatment.With respect to the redemption,Eleanor will have a:

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

Coral Corporation declares a nontaxable dividend payable in rights to subscribe to common stock.Each right entitles the holder to purchase one share of stock for $219- One right is issued for every two shares of stock owned.John owns 100 shares of stock in Coral,which he purchased three years ago for $3,000.At the time of the distribution,the value of the stock is $45 per share and the value of the rights is $2 per share.John receives 50 rights.He exercises 25 rights and sells the remaining 25 rights three months later for $2.50 per right.