Question 1

What is a constructive dividend? Under what circumstances are constructive dividends most likely to arise?

Accepted Answer

A constructive dividend (or undeclared d

Question 2

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:
 $\begin{array}{ccc}&\text {Current E\&P}&\text {Accumulated E\&P}\\end{array}$
A) $\begin{array}{ccc}& \$ 30,000 &&&& \$ 100,000 \\end{array}$
B) $\begin{array}{ccc}& 50,000 &&&&& (50,000) \\end{array}$
C)$\begin{array}{ccc} & (73,000) &&&&& 40,000 \\end{array}$
D) $\begin{array}{ccc}& (20,000) &&&& (50,000)
\end{array}$

Accepted Answer

a) $120,000 is a dividend to Evan.
b) $5

Question 3

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.

Accepted Answer

A)  The entire $500,000 is taxable to Marie in the year of receipt and $150,000 of the compensation is deductible by Marie last year. 
B)  Marie must amend the return of two years ago to adjust her taxable compensation to the agreed- upon reasonable amount. 
C)  The entire $500,000 is taxable to Marie in the year of receipt and $150,000 of the compensation is deductible by Marie this year. 
D)  Marie must not include the agreed-upon amount in her return since it is not deductible. 
A)  The entire $500,000 is taxable to Marie in the year of receipt and $150,000 of the compensation is deductible by Marie last year. 
B)  Marie must amend the return of two years ago to adjust her taxable compensation to the agreed- upon reasonable amount. 
C)  The entire $500,000 is taxable to Marie in the year of receipt and $150,000 of the compensation is deductible by Marie this year. 
D)  Marie must not include the agreed-upon amount in her return since it is not deductible.

Question 4

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 5

Good Times Corporation has a $60,000 accumulated E&P balance at the beginning of the year and incurs a $100,000 deficit during the year. Because of its poor operating performance, Good Times pays only three of its usual $10,000 quarterly dividend payments to its sole shareholder: those ordinarily paid March 31, June 30, and September 30. How are the March 31, June 30, and September 30 payments of $10,000 treated?

Accepted Answer

A)  dividend; dividend; return of capital 
B)  dividend; return of capital; return of capital 
C)  return of capital; dividend; dividend 
D)  return of capital; return of capital; dividend 
A)  dividend; dividend; return of capital 
B)  dividend; return of capital; return of capital 
C)  return of capital; dividend; dividend 
D)  return of capital; return of capital; dividend

Question 6

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

Question 7

In 2010, Tru Corporation deducted $5,000 of bad debts. It received no tax benefit from the deduction because it had an NOL in 2010 that it was unable to carry back or forward. In 2011, Tru recovered $4,000 of the amount due.
a) What amount must Tru include in income in 2011?
b) What effect does the $4,000 have on E&P in 2011, if any?

Accepted Answer

a) Tru excludes the $4,000 from gross in

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

In a taxable distribution of stock, the recipient shareholder takes a basis equal to the FMV of the stock received.

Accepted Answer

A) True 
 B)False

Question 10

Outline the computation of current E&P, including two examples for each adjustment.

Accepted Answer

Taxable income
Plus: income excluded fro

Question 11

Dave, Erica, and Faye are all unrelated. Each has owned 100 shares of News Corporation stock for five years and each has a $180,000 basis in those 100 shares. News Corporation's E&P is $720,000. News redeems all 100 of Dave's shares for $300,000, their FMV.
a) What is the amount and character of Dave's recognized gain or loss? What basis do Erica and Faye have in their remaining shares? What effect does the redemption have on News's E&P?
b) Assuming instead that Dave is Erica's son, answer the questions in part (a) again.

Accepted Answer

a) This is a complete termination of int

Question 12

Jack Corporation redeems 200 shares of its stock for $100,000 from Junior, who inherited the stock from his father, Ken. The stock's FMV on Ken's date of death was $90,000. Ken's basis in the stock was $40,000. Jack Corporation had an E&P balance of $300,000. If the redemption qualifies under Sec. 303, Junior will

Accepted Answer

A)  recognize a capital gain of $10,000. 
B)  recognize a capital gain of $60,000. 
C)  recognize $100,000 in dividend income. 
D)  recognize dividend income of $50,000 and a capital gain of $10,000. 
A)  recognize a capital gain of $10,000. 
B)  recognize a capital gain of $60,000. 
C)  recognize $100,000 in dividend income. 
D)  recognize dividend income of $50,000 and a capital gain of $10,000.

Question 13

Circle Corporation has 1,000 shares of common stock outstanding. Circle redeems 450 shares owned by Dennis for $75,000 in complete redemption of Dennis's interest. The redemption qualifies as a sale. When the redemption is made, Circle Corporation has $150,000 of current and accumulated E&P and paid-in capital of $50,000. The distribution reduces paid-in capital by

Accepted Answer

A)  $67,500. 
B)  $22,500. 
C)  $7,500. 
D)  $0. 
A)  $67,500. 
B)  $22,500. 
C)  $7,500. 
D)  $0.

Question 14

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 15

Identify which of the following statements is true.

Accepted Answer

A)  The FMV of an obligation is used to determine the E&P reduction when a corporation distributes the obligation to its shareholders. 
B)  When appreciated property is distributed to shareholders, E&P must be increased by any gain (net of taxes) recognized due to the property distribution. 
C)  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 net of the FMV of the property distributed minus the gain (net of federal income taxes) recognized due to the property distribution. 
D)  Only B and C above are true. 
A)  The FMV of an obligation is used to determine the E&P reduction when a corporation distributes the obligation to its shareholders. 
B)  When appreciated property is distributed to shareholders, E&P must be increased by any gain (net of taxes) recognized due to the property distribution. 
C)  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 net of the FMV of the property distributed minus the gain (net of federal income taxes) recognized due to the property distribution. 
D)  Only B and C above are true.

Question 16

In the current year, Pearl Corporation has $300,000 of current and accumulated E&P. On June 3, Pearl Corporation distributes a parcel of land (a capital asset) worth $120,000 to Betty, a shareholder. The land has a $60,000 adjusted basis to Pearl Corporation and is subject to a $16,000 mortgage, which Betty assumes. Assume a 34% marginal corporate tax rate.
a) What is the amount and character of the income recognized by Betty as a result of the distribution?
b) What is Betty's basis for the land?
c) What is the amount and character of Pearl's gain or loss as a result of the distribution?
d) What effect does the distribution have on Pearl's E&P?

Accepted Answer

a) Betty has a taxable dividend of $104,

Question 17

Identify which of the following statements is true.

Accepted Answer

A)  If a stock redemption is made by an estate following the decedent's death, the redemption may receive capital gains treatment only if the money is actually used to pay the death taxes. 
B)  Attribution rules do not apply to qualified Sec. 303 stock redemptions. 
C)  The value of decedent's stock satisfies the Sec. 303 minimum if it is less than 35% of the decedent's gross estate. 
D)  All of the above are false. 
A)  If a stock redemption is made by an estate following the decedent's death, the redemption may receive capital gains treatment only if the money is actually used to pay the death taxes. 
B)  Attribution rules do not apply to qualified Sec. 303 stock redemptions. 
C)  The value of decedent's stock satisfies the Sec. 303 minimum if it is less than 35% of the decedent's gross estate. 
D)  All of the above are false.

Question 18

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 19

Payment Corporation has accumulated E&P of $19,000 and current E&P of $28,000. During the year, the corporation makes the following distributions to its sole shareholder:
 $\begin{array}{|l|c|}
\hline{\text { Date }} & \begin{array}{c}
\text { Amount } \
\text { Distributed }
\end{array} \
\hline \text { April 1 } & \$ 20,000 \
\text { Tune 1 } & 20,000 \
\text { August 1 } & 15,000 \
\text { November 1 } & 5,000 \
\hline
\end{array}$ The sole shareholder's basis in her stock is $45,000. What are the tax consequences of the June 1 distribution?

Accepted Answer

The current E&P is allocated ratably to

Question 20

Why are stock dividends generally nontaxable? Under what circumstances are stock dividends taxable?

Accepted Answer

Stock dividends generally are nontaxable

What is a constructive dividend? Under what circumstances are constructive dividends most likely to arise?

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?

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

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

In a taxable distribution of stock, the recipient shareholder takes a basis equal to the FMV of the stock received.

Outline the computation of current E&P, including two examples for each adjustment.

Identify which of the following increases Earnings & Profits.

Identify which of the following statements is true.

Identify which of the following statements is true.

Why are stock dividends generally nontaxable? Under what circumstances are stock dividends taxable?

Tax Research

Corporate Formations and Capital Structure

The Corporate Income Tax

Other Corporate Tax Levies

Corporate Liquidating Distributions

Corporate Acquisitions and Reorganizations

Consolidated Tax Returns

Partnership Formation and Operation

Special Partnership Issues

S Corporations

The Gift Tax

The Estate Tax

Income Taxation of Trusts and Estates

Administrative Procedures

an Introduction to Taxation

Determination of Tax

Gross Income: Inclusions

Gross Income: Exclusions

Property Transactions: Capital Gains and Losses

Deductions and Losses

Itemized Deductions

Losses and Bad Debts

Employee Expenses and Deferred Compensation

Depreciation, Cost Recovery, Amortization, and Depletion

Accounting Periods and Methods

Property Transactions: Nontaxable Exchanges

Property Transactions: Section 1231 and Recapture

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

Filters

Exam 4: Corporate Nonliquidating Distributions

What is a constructive dividend? Under what circumstances are constructive dividends most likely to arise?

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?

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

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

In a taxable distribution of stock, the recipient shareholder takes a basis equal to the FMV of the stock received.

Outline the computation of current E&P, including two examples for each adjustment.

Identify which of the following increases Earnings & Profits.

Identify which of the following statements is true.

Identify which of the following statements is true.

Why are stock dividends generally nontaxable? Under what circumstances are stock dividends taxable?

Tax Research

Corporate Formations and Capital Structure

The Corporate Income Tax

Other Corporate Tax Levies

Corporate Liquidating Distributions

Corporate Acquisitions and Reorganizations

Consolidated Tax Returns

Partnership Formation and Operation

Special Partnership Issues

S Corporations

The Gift Tax

The Estate Tax

Income Taxation of Trusts and Estates

Administrative Procedures

an Introduction to Taxation

Determination of Tax

Gross Income: Inclusions

Gross Income: Exclusions

Property Transactions: Capital Gains and Losses

Deductions and Losses

Itemized Deductions

Losses and Bad Debts

Employee Expenses and Deferred Compensation

Depreciation, Cost Recovery, Amortization, and Depletion

Accounting Periods and Methods

Property Transactions: Nontaxable Exchanges

Property Transactions: Section 1231 and Recapture

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

Filters