Exam 4: Corporate Nonliquidating Distributions

Kiara owns 100% of the shares of Lion Corporation. Kiara's basis is $70,000 and the FMV of the shares is $200,000. Kiara is willing to sell all of the stock to Tia, but Tia is unwilling to pay more than $150,000 for the stock because the Corporation has excess cash balances. They have agreed that Kiara can withdraw $50,000 in cash from Lion before the stock sale. What tax issues should be considered with respect to Kiara and Tia's agreement?

Omega Corporation is formed in 2006. Its current E&P and distributions for each year through 2010 are as follows: $\begin{array}{lll}\text {Year}&\text {Current E\&P (deficit)}&\text {Distributions}\\2007 & \$(20,000) & 0 \\2008 & 30,000 & 0 \\2009 & 36,000 & \$ 18,000 \\2010 & 16,000 & 0\end{array}$ Is the distribution made from current or accumulated E&P? At the beginning of 2011, what is accumulated E&P?

Nichol Corporation has 100 shares of common stock outstanding. Nichol repurchased all of Ned's 30 shares for $35,000 cash during the current year. Ned received the shares as a gift from his mother three years ago. They have a basis to him of $16,000. Nichol Corporation has $100,000 in current and accumulated E&P. Ned's mother owns 40 of the remaining shares; unrelated individuals own the other 30 shares. What tax issues should be considered with respect to the corporation's purchase of Ned's shares?

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

Identify which of the following statements is true.

Peach Corporation was formed four years ago. Its current E&P (or E&P deficit) and distributions for the most recent four years are as follows: Year Current E\&P (Deficit) Distributions 2005 (\ 20,000) \ 2,000 2006 8,000 4,000 2007 (5,000) 0 2008 25,000 4,000 What is Peach's accumulated E&P at the beginning of 2006, 2007, 2008, and 2009?

What are the consequences of a stock redemption to the distributing corporation?

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.

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

Identify which of the following statements is true.

Which of the following is not a condition that permits a stock redemption to be treated as a sale?

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?

Grant Corporation sells land (a noninventory item) with a basis of $57,000 for $100,000. Nichole will be paid on an installment basis in five equal annual payments, starting in the current year. The E&P for the year of sale will be increased as a result of the sale (excluding federal income taxes) by

A partial liquidation of a corporation is treated as a dividend in the case of a corporate shareholder.

A stock redemption is always treated as if the shareholder sold his stock to the corporation.

John, the sole shareholder of Photo Specialty Corporation has had an exceptional year. He is considering issuing himself a large bonus in lieu of a dividend. You are concerned about unreasonable compensation. What issues must be considered?

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:

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.

Oreo Corporation has accumulated E&P of $8,000 at the beginning of the current year. During the year (a nonleap year), the corporation incurs a current E&P deficit of $18,250. The corporation distributes $11,000 on March 20th to Morris, its sole shareholder, who has a $9,000 basis for his stock. If the exact loss cannot be determined as of the date of distribution, the treatment of the distribution will be