Question 1

Identify which of the following statements is true.

Accepted Answer

A) To have a bona fide partial liquidation,a firm must continue to conduct a qualified trade or business,which it had conducted for a period of more than three years prior to the redemption. 
B) To qualify as a partial liquidation,a distribution must result in a bona fide contraction of the corporate business at the corporate level. 
C) A partial liquidation of a corporation must be pro rata. 
D) All of the above are false. 
A) To have a bona fide partial liquidation,a firm must continue to conduct a qualified trade or business,which it had conducted for a period of more than three years prior to the redemption. 
B) To qualify as a partial liquidation,a distribution must result in a bona fide contraction of the corporate business at the corporate level. 
C) A partial liquidation of a corporation must be pro rata. 
D) All of the above are false.

Question 2

White Corporation is a calendar-year taxpayer.Wilhelmina owns all of its stock.Her basis for the stock is $25,000.On March 1 of the current year (not a leap year),White Corporation distributes $60,000 to Wilhelmina.Determine the tax consequences of the cash distribution to Wilhelmina in each of the following independent situations:
a)Current E&P $15,000,accumulated E&P $50,000.
b)Current E&P $25,000,accumulated E&P $(25,000).
c)Current E&P ($36,500),accumulated E&P $65,000.
d)Current E&P ($10,000),accumulated E&P $(25,000.

Accepted Answer

a)$60,000 dividend to Wilhelmina; $15,00

Question 3

River Corporation's taxable income is $25,000,after deducting a $5,000 NOL carryover from last year and after claiming a $10,000 dividends-received deduction.What is the current E&P?

Accepted Answer

River must add back the $10,00

Question 4

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 transaction is recast under Sec.304

Question 5

A corporation distributes land and the related liability to Meg,its sole shareholder.The land has an FMV of $60,000 and is subject to a liability of $70,000.The corporation has current and accumulated E&P of $80,000.The corporation's adjusted basis for the property is $70,000.What effect does the transaction have on the corporation?

Accepted Answer

A) A recognized loss of $10,000; its E&P is reduced by $70,000. 
B) A recognized loss of $10,000; its E&P is unchanged. 
C) No recognized gain or loss; its E&P is reduced by $60,000. 
D) No recognized gain or loss; its E&P is unchanged by the distribution. 
A) A recognized loss of $10,000; its E&P is reduced by $70,000. 
B) A recognized loss of $10,000; its E&P is unchanged. 
C) No recognized gain or loss; its E&P is reduced by $60,000. 
D) No recognized gain or loss; its E&P is unchanged by the distribution.

Question 6

Perch Corporation has made paint and paint brushes for the past ten years.Perch Corporation is owned equally by Arnold,an individual,and Acorn Corporation.Perch Corporation has $100,000 of accumulated and current E&P.Both Arnold and Acorn Corporation have a basis in their stock of $10,000.Perch Corporation discontinues the paint brush operation and distributes assets worth $10,000 each to Arnold and Acorn Corporation in redemption of 20% of their stock.Due to the distribution,Arnold and Acorn Corporation must report:

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 7

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 Van causes Valley Metal Corporation to redeem his remaining shares for $30,000. 
C) 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. 
D) 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. 
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 Van causes Valley Metal Corporation to redeem his remaining shares for $30,000. 
C) 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. 
D) 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.

Question 8

Which of the following is not a reason for a stock redemption?

Accepted Answer

A) desire by remaining shareholders to retain control 
B) desire by shareholders to reduce the corporate tax liability 
C) Redemption of shares is a good corporate investment. 
D) No outside market exists for the stock. 
A) desire by remaining shareholders to retain control 
B) desire by shareholders to reduce the corporate tax liability 
C) Redemption of shares is a good corporate investment. 
D) No outside market exists for the stock.

Question 9

Identify which of the following statements is true.

Accepted Answer

A) Stock ownership attributed to a corporation from one of its shareholders cannot be attributed to another of the corporation's shareholders under the Sec.318 attribution rules. 
B) Under the attribution rules relating to stock redemptions,a person who has an option to purchase stock is considered to own the stock. 
C) A stock redemption that qualifies as substantially disproportionate is a safe harbor for capital gain treatment. 
D) All of the above are true. 
A) Stock ownership attributed to a corporation from one of its shareholders cannot be attributed to another of the corporation's shareholders under the Sec.318 attribution rules. 
B) Under the attribution rules relating to stock redemptions,a person who has an option to purchase stock is considered to own the stock. 
C) A stock redemption that qualifies as substantially disproportionate is a safe harbor for capital gain treatment. 
D) All of the above are true.

Question 10

Identify which of the following increases Earnings & Profits.

Accepted Answer

A) a capital contribution 
B) life insurance proceeds payable to the spouse 
C) tax-exempt interest income 
D) All of the above increase E&P of a corporation. 
A) a capital contribution 
B) life insurance proceeds payable to the spouse 
C) tax-exempt interest income 
D) All of the above increase E&P of a corporation.

Question 11

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

Accepted Answer

The basic purpose of Form 5452,Corporate

Question 12

Identify which of the following statements is true.

Accepted Answer

A) Only stock included in the decedent's gross estate can be redeemed under the Sec.303 provisions. 
B) If the stock redemption proceeds are used to pay either the estate's funeral and administrative expenses or death taxes,the redemption can qualify for capital gains treatment under Sec.303. 
C) Usually,a stock redemption qualifying under Sec.303 as a redemption to pay death taxes will result in little or no gain to the redeeming shareholder. 
D) All of the above are true. 
A) Only stock included in the decedent's gross estate can be redeemed under the Sec.303 provisions. 
B) If the stock redemption proceeds are used to pay either the estate's funeral and administrative expenses or death taxes,the redemption can qualify for capital gains treatment under Sec.303. 
C) Usually,a stock redemption qualifying under Sec.303 as a redemption to pay death taxes will result in little or no gain to the redeeming shareholder. 
D) All of the above are true.

Question 13

In the current year,Red Corporation has $100,000 of current and accumulated E&P.On March 2,Red Corporation distributes to Randy,a shareholder,a parcel of land (a capital asset)having a $60,000 FMV.The land has a $30,000 adjusted basis (for both tax and E&P purposes)to Red Corporation and is subject to an $8,000 mortgage,which Randy assumes.Assume a 34% marginal corporate tax rate.
a)What is the amount and character of the income Randy recognizes as a result of the distribution?
b)What is Randy's basis for the land?
c)What is the amount and character of Red Corporation's gain or loss as a result of the distribution?
d)What effect does the distribution have on Red Corporation's E&P?

Accepted Answer

a)Randy receives a taxable dividend of $

Question 14

When is E&P measured for purposes of determining whether a distribution is a dividend?

Accepted Answer

Usually at year-end.However,if

Question 15

Omega Corporation is formed in 2006.Its current E&P and distributions for each year through 2010 are as follows:   Is the distribution made from current or accumulated E&P? At the beginning of 2011,what is accumulated E&P?

Accepted Answer

The $18,000 distribution is made from 20

Question 16

Identify which of the following statements is true.

Accepted Answer

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

Question 17

Which of the following statements is not true about redemptions?

Accepted Answer

A) Redemptions of Sec.306 stock are generally treated as dividends to the shareholder. 
B) A sale of stock from one controlled corporation to another controlled corporation is treated as a redemption. 
C) Redemptions to pay death taxes are treated as dividends to the shareholder. 
D) A distribution in redemption of stock is generally a dividend. 
A) Redemptions of Sec.306 stock are generally treated as dividends to the shareholder. 
B) A sale of stock from one controlled corporation to another controlled corporation is treated as a redemption. 
C) Redemptions to pay death taxes are treated as dividends to the shareholder. 
D) A distribution in redemption of stock is generally a dividend.

Question 18

Bat Corporation distributes stock rights with a $20,000 FMV to its common stock shareholders.The $20,000 value of the stock rights at the time of distribution is less than 15% of the value of the underlying stock.Which of the following statements is true?

Accepted Answer

A) A shareholder must allocate basis to the rights based on the relative FMVs of the stock and the rights. 
B) A shareholder cannot allocate any basis to the rights. 
C) The basis in the rights is zero unless a shareholder makes a valid election to allocate basis to the rights. 
D) The holding period for the rights begins on the day the rights are distributed in all cases. 
A) A shareholder must allocate basis to the rights based on the relative FMVs of the stock and the rights. 
B) A shareholder cannot allocate any basis to the rights. 
C) The basis in the rights is zero unless a shareholder makes a valid election to allocate basis to the rights. 
D) The holding period for the rights begins on the day the rights are distributed in all cases.

Question 19

Susan owns 150 of the 200 outstanding shares of Parent Corporation's stock.Parent owns 160 of the 200 outstanding shares of Subsidiary Corporation's stock.Susan sells 50 shares of her Parent stock to Subsidiary for $40,000.Susan's basis in her Parent shares is $15,000 ($100 per share).Subsidiary Corporation and Parent Corporation have E&P of $60,000 and $25,000,respectively,at the end of the year in which the redemption occurs.
a)What is the amount and character of Susan's gain or loss on the sale?
b)What is Susan's basis in her remaining shares of Parent stock?
c)How does the sale affect the E&P of Parent and Subsidiary Corporations?
d)What basis does Subsidiary Corporation take in the Parent shares it purchases?
e)How would your answer to Part (a)change if Susan instead sells 100 of her Parent shares to Subsidiary Corporation for $80,000?

Accepted Answer

a)The sale is recast as a redemption.Sin

Question 20

When computing E & P,Section 179 property must be expensed ratably over a five-year period,starting with the month in which it is expensed for Sec.179 purposes.

Accepted Answer

A) True 
 B)False

Exam 7: Corporate Nonliquidating Distributions

Identify which of the following statements is true.

River Corporation's taxable income is $25,000,after deducting a $5,000 NOL carryover from last year and after claiming a $10,000 dividends-received deduction.What is the current E&P?

Which of the following is not a reason for a stock redemption?

Identify which of the following statements is true.

Identify which of the following increases Earnings & Profits.

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.

When is E&P measured for purposes of determining whether a distribution is a dividend?

Omega Corporation is formed in 2006.Its current E&P and distributions for each year through 2010 are as follows: Is the distribution made from current or accumulated E&P? At the beginning of 2011,what is accumulated E&P?

Identify which of the following statements is true.

Which of the following statements is not true about redemptions?

Bat Corporation distributes stock rights with a $20,000 FMV to its common stock shareholders.The $20,000 value of the stock rights at the time of distribution is less than 15% of the value of the underlying stock.Which of the following statements is true?

When computing E & P,Section 179 property must be expensed ratably over a five-year period,starting with the month in which it is expensed for Sec.179 purposes.

Tax Research

an Introduction to Taxation

Corporate Formations and Capital Structure

Determination of Tax

The Corporate Income Tax

Gross Income: Inclusions

Gross Income: Exclusions

Other Corporate Tax Levies

Property Transactions: Capital Gains and Losses

Corporate Liquidating Distributions

Deductions and Losses

Corporate Acquisitions and Reorganizations

Itemized Deductions

Consolidated Tax Returns

Losses and Bad Debts

Partnership Formation and Operation

Employee Expenses and Deferred Compensation

Special Partnership Issues

Depreciation,cost Recovery,amortization,and Depletion

Corporations

Accounting Periods and Methods

The Gift Tax

Property Transactions: Nontaxable Exchanges

The Estate Tax

Property Transactions: Section 1231 and Recapture

Income Taxation of Trusts and Estates

Special Tax Computation Methods,tax Credits,and Payment of Tax

Administrative Procedures

Filters