Question 1

Stone Corporation redeems 1,000 share of its stock from Steve for $100,000. Steve's basis in those shares is
$80,000. What tax issues should Steve consider with respect to the transaction?

Accepted Answer

The answer of Stone Corporation redeems 1,000 share of its...

Question 2

Gould Corporation distributes land (a capital asset) worth $90,000 to Gerry, a shareholder. The land has a
$30,000 basis to Gould. What is the amount and character of the gain or loss recognized by Gould?

Accepted Answer

The answer of Gould Corporation distributes land (a capital asset)...

Question 3

Ameriparent Corporation owns a 70% interest in Flag Corporation. The corporations have current and accumulated E&Ps of $25,000 and $40,000, respectively. Taxpayer, who has a $20,000 basis in her 40% ownership interest of Ameriparent Corporation, sells sufficient stock to Flag to reduce her interest in Ameriparent from 40% to 20%. Taxpayer receives $20,000 for the stock she surrenders. What are the tax consequences of the transaction for Taxpayer?

Accepted Answer

The answer of Ameriparent Corporation owns a 70% interest in...

Question 4

Alice owns 56% of Daisy Corporation's stock and 50% of May Corporation's stock. Alice sells one- half of her interest in May Corporation to Daisy Corporation for $30,000. The E&P balances of Daisy and May are $25,000 and $35,000, respectively. Alice's basis in her Daisy stock is $40,000 and her basis in the May stock is $38,000. What are the tax consequences of the transaction?

Accepted Answer

The answer of Alice owns 56% of Daisy Corporation's stock...

Question 5

Identify which of the following statements is true.

Accepted Answer

A)  The shareholder's basis in property received in a nonliquidating distribution is the property's FMV reduced by liabilities assumed by the shareholder. 
B)  If both the current and accumulated E&P have deficit balances, a corporate distribution cannot be characterized as a dividend. 
C)  A corporation recognizes gain when distributing money as a dividend to its shareholders. 
D)  All of the above are false.

Question 6

Van owns all 1,000 shares of Valley Metal Corporation stock. The stock has a $100,000 FMV. Karen wants to purchase the stock from Van but has only $70,000. Valley Metal has ample cash, which is not needed for operations. Which of the following best qualifies for bootstrap redemption treatment and no constructive dividends to the purchaser?

Accepted Answer

A)  Karen contracts to acquire all the stock of the corporation on an installment plan and then uses corporate funds to pay the installment obligations. 
B)  Karen buys 70 shares from Van for $70,000 and then contracts to buy the remaining 30 shares from Van. She then causes Valley Metal Corporation to redeem Van's 30 shares. 
C)  Karen buys 70 shares from Van for $70,000 and obtains an option to purchase Van's remaining stock for $50,000. Karen then assigns the option to Valley Metal Corporation. The corporation subsequently exercises the option. 
D)  Karen buys 70 shares from Van for $70,000 and Van causes Valley Metal Corporation to redeem his remaining shares for $30,000.

Question 7

The Sec. 318 family attribution rules can be waived for purposes of the Sec. 302(b)(3) complete termination rules even though the redeeming shareholder is a creditor of the corporation.

Accepted Answer

A) True 
 B)False

Question 8

Corporations may always use retained earnings as a substitute for earnings and profits.

Accepted Answer

A) True 
 B)False

Question 9

Dixie Corporation distributes $31,000 to its sole shareholder, Sally. At the time of the distribution, Dixie's E&P is $25,000 and Sally's basis in her Dixie stock is $10,000. Sally's basis in her Dixie stock after the distribution is

Accepted Answer

A)  $10,000. 
B)  $25,000. 
C)  $4,000. 
D)  $31,000.

Question 10

Strong Corporation is owned by a group of 20 shareholders. During the current year, Strong Corporation pays $ in salary and bonuses to Stedman, its president and controlling shareholder. The IRS audits Strong's tax return a determines that reasonable compensation for Stedman would be $125,000. Strong Corporation agrees to the adju
a) What effect does the disallowance of part of the deduction for Stedman's salary and bonuses have on Strong Corporation and Stedman?
b) What tax savings could have been obtained by Strong Corporation and Stedman if an agreement had been in that required Stedman to repay Strong Corporation any amounts determined by the IRS to be unreasonable?

Accepted Answer

The answer of Strong Corporation is owned by a group...

Question 11

Crossroads Corporation distributes $60,000 to its sole shareholder Harley. Crossroads has earnings and profits of $55,000 and Harley's basis in her stock is $20,000. After the distribution, Harley's basis is

Accepted Answer

A)  $60,000. 
B)  $5,000. 
C)  $15,000. 
D)  $20,000.

Question 12

Green Corporation is a calendar- year taxpayer. All of the stock is owned by Evan. His basis for the stock is
$35,000. On March 1 (of a non- leap year), Green Corporation distributes $120,000 to Evan. Determine the tax consequences of the cash distribution to Evan in each of the following independent situations:

Accepted Answer

The answer of Green Corporation is a calendar- year taxpayer....

Question 13

Identify which of the following statements is true.

Accepted Answer

A)  Loans made to shareholders in proportion to their stock ownership in the corporation is evidence that the loans are disguised dividends. 
B)  If the shareholder can elect to receive distributing corporation stock or money, the receipt of distributing corporation stock will be a taxable dividend. 
C)  Corporate payments for the shareholder's benefit may be a taxable dividend. 
D)  All of the above are true.

Question 14

Which of the following requirements must be met for a redemption to be treated as substantially disproportionate?

Accepted Answer

A)  The shareholder must own less than 50% of the outstanding stock (in terms of voting power) after the redemption. 
B)  After the redemption, the shareholder must own less than 80% of his percentage ownership of common stock (voting and nonvoting) prior to the redemption. 
C)  After the redemption, the shareholder must own less than 80% of his percentage ownership of voting stock prior to the redemption. 
D)  All of the above must be met.

Question 15

What must be reported to the IRS by corporations when nondividend distributions are made to its shareholders?

Accepted Answer

The answer of What must be reported to the IRS...

Question 16

Exit Corporation has accumulated E&P of $24,000 at the beginning of the current tax year. Current E&P is $20,000. During the year, the corporation makes the following distributions to its sole shareholder who has a $22,000 basis for her stock.  The treatment of the $15,000 August 1 distribution would be 
A) $15,000 is taxable as a dividend; $5,000 from current E&P and the balance from accumulated E&P.
B) $4,000 is taxable as a dividend from accumulated E&P, and $11,000 is tax- free as a return of capital.
C) $15,000 is taxable as a dividend from accumulated E&P.
D) $5,000 is taxable as a dividend from current E&P, and $10,000 is tax- free as a return of capital.

Accepted Answer

The answer of Exit Corporation has accumulated E&P of $24,000...

Question 17

Identify which of the following statements is true.

Accepted Answer

A)  Losses on property sales to related parties are not deductible when computing E&P. 
B)  Distributions made out of accumulated E&P are allocated ratably between multiple distributions made during the tax year. 
C)  Section 179 property must be expensed ratably over a five- year period when computing E&P. 
D)  All of the above are false.

Question 18

Identify which of the following statements is false.

Accepted Answer

A)  The rules for the recognition of a gain or loss by a corporation that distributes property in redemption of its stock are the same as the rules for property distributions that are not in redemption of stock. 
B)  Under Sec. 311, a corporation does not recognize a loss when it distributes property that has declined in value. 
C)  When a stock redemption is considered a sale of stock by the shareholder, the E&P of the redeeming corporation is reduced by the FMV of the property used to redeem the stock. 
D)  Generally, little or no gain is recognized by the redeeming shareholder in a qualified Sec. 303 redemption.

Question 19

Identify which of the following statements is false.

Accepted Answer

A)  The holding period for stock rights includes the holding period for the underlying stock. 
B)  The distribution of stock rights is generally tax free under Sec. 305. 
C)  The distribution of stock rights will be taxable if the value of the stock rights is more than 15% of the value of the underlying stock. 
D)  If the value of stock rights is less than 15% of the value of the underlying stock, the basis of the rights is zero unless the shareholder elects to allocate basis to the rights.

Question 20

John owns 70% of the May Corporation stock and 60% of the June Corporation stock. John sells one- half of his interest in May Corporation to June Corporation for $45,000. The E&P accounts of May and June are $25,000 and $35,000, respectively. The result would be that

Accepted Answer

A)  John has sold his stock and reports a capital gain or loss. 
B)  the sale is recast as a dividend paid to John, first by June and then by May. 
C)  John has sold his stock and reports a capital gain but no loss. 
D)  the transaction is treated as a contribution to May's capital and a redemption of June stock.

Exam 4: Corporate Nonliquidating Distributions

Stone Corporation redeems 1,000 share of its stock from Steve for $100,000. Steve's basis in those shares is $80,000. What tax issues should Steve consider with respect to the transaction?

Gould Corporation distributes land (a capital asset) worth $90,000 to Gerry, a shareholder. The land has a $30,000 basis to Gould. What is the amount and character of the gain or loss recognized by Gould?

Identify which of the following statements is true.

The Sec. 318 family attribution rules can be waived for purposes of the Sec. 302(b)(3) complete termination rules even though the redeeming shareholder is a creditor of the corporation.

Corporations may always use retained earnings as a substitute for earnings and profits.

Dixie Corporation distributes $31,000 to its sole shareholder, Sally. At the time of the distribution, Dixie's E&P is $25,000 and Sally's basis in her Dixie stock is $10,000. Sally's basis in her Dixie stock after the distribution is

Crossroads Corporation distributes $60,000 to its sole shareholder Harley. Crossroads has earnings and profits of $55,000 and Harley's basis in her stock is $20,000. After the distribution, Harley's basis is

Identify which of the following statements is true.

Which of the following requirements must be met for a redemption to be treated as substantially disproportionate?

What must be reported to the IRS by corporations when nondividend distributions are made to its shareholders?

Identify which of the following statements is true.

Identify which of the following statements is false.

Identify which of the following statements is false.

John owns 70% of the May Corporation stock and 60% of the June Corporation stock. John sells one- half of his interest in May Corporation to June Corporation for $45,000. The E&P accounts of May and June are $25,000 and $35,000, respectively. The result would be that