Exam 7: Corporate Nonliquidating Distributions

For purposes of determining current E&P,which of the following items cannot be deducted in the year incurred?

Ace Corporation has a single class of stock outstanding.Alan owns 200 shares of the common stock,which he purchased for $50 per share two years ago.On April 10,of the current year,Ace Corporation distributes to its shareholders one right to purchase a share of common stock at $60 per share for each share of common stock held.At the time of the distribution,the common stock is worth $75 per share,and the rights are worth $15 per right.On September 10,Alan sells 100 rights for $2,000 and exercises the remaining 100 rights.He sells 60 of the shares acquired with the rights for $80 each on November 10. a)What is the amount and character of income Alan recognizes when he receives the rights? b)What is the amount and character of gain or loss Alan recognizes when he sells the rights? c)What is the amount and character of gain or loss Alan recognizes when he exercises the rights? d)What is the amount and character of gain or loss Alan recognizes when he sells the new common stock? e)What basis does Alan have in his remaining shares?

Family Corporation,a corporation controlled by Buddy's family,redeems all of Buddy's stock.For the redemption to be treated as a sale,which one of the following conditions must be met?

Elijah owns 20% of Park Corporation's single class of stock.Elijah's basis in the stock is $8,000.Park's E&P is $28,000.If Park redeems all of Elijah's stock for $48,000,Elijah must report dividend income of

Rose has a $20,000 basis in the 60% of the Parent Corporation stock that she owns.Parent Corporation owns a 70% interest in Child Corporation.Parent and Child have current and accumulated E&P balances of $25,000 and $40,000,respectively.In return for $15,000,Rose sells 10% of the Parent Corporation stock to Child Corporation.What is the impact of the transaction on Rose?

Identify which of the following statements is false.

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

In a nontaxable distribution of stock rights,when the value of the rights is less than 15% of the value of the stock with respect to which the rights were distributed,the basis of the rights is zero unless the shareholder elects to allocate stock basis to the rights.

Poppy Corporation was formed three years ago.Poppy's E&P history is as follows: Poppy Corporation's accumulated E&P on January 1 will be

Marie owns one-half of the stock of Starke Corporation and serves as its President.The remaining stock is owned by 10 investors,none of whom owns more than 10% of the outstanding shares.Marie entered a hedge agreement with the corporation three years ago about salary payments that are declared unreasonable compensation by the IRS.Two years ago,the Corporation paid Marie a salary and bonus of $500,000.The IRS subsequently held that $200,000 of the salary is unreasonable compensation.Last year,Starke Corporation and the IRS agreed that $150,000 of the compensation is,in fact,unreasonable.This year,the $150,000 is repaid by Marie to the corporation.

How does a shareholder classify a distribution for tax purposes?

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.

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

Tomika Corporation has current and accumulated earnings and profits of $0.Tomika distributes $10,000 to its sole shareholder,Alana.What are Tomika's earnings and profits after the distribution?

Identify which of the following statements is false.

When computing E&P and taxable income,different depreciation methods are often used.What happens when the taxpayer sells such assets?

Identify which of the following statements is true.

When appreciated property is distributed in a nonliquidating distribution,the net effect on the distributing corporation's E&P is that it is reduced by the FMV of the property distributed and increased by the gain (net of federal income taxes)recognized due to the property distribution.

Identify which of the following statements is true.

Tia receives a $15,000 cash distribution from Main Corporation in March of the current year.Main has $6,000 of accumulated E&P at the beginning of the year and $12,000 of current E&P.Main also distributed $15,000 in cash to Betty,who purchased all 300 shares of Main stock from Tia in June of the current year.What tax issues should be considered with respect to the distributions paid to Tia and Betty?