Question 1

Corporate distributions that exceed earnings and profits are always capital gains.

Accepted Answer

A) True 
 B)False

Question 2

What is a stock redemption? What are some of the reasons for making a stock redemption? Why are some redemptions treated as sales and others as dividends?

Accepted Answer

A stock redemption is the acquisition by

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.How much of the $500,000 compensation was taxable to Marie when originally paid and how much is taxable in the current year?

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

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)  $$\begin{array} { | l | l | } 
\hline\text { Arnold } & \text { Acorn Corporation } \
\hline \$ 8,000 \text { capital gain } & \$ 8,000 \text { capital gain } \
\hline
\end{array}$$ 
B)  $$\begin{array} { | l | l | } 
\hline\text { Arnold } & \text { Acorn Corporation } \
\hline 88,000 \text { capital gain } & \$ 10,000 \text { dividend } \
\hline
\end{array}$$ 
C)  $$\begin{array} { | l | l | } 
\hline\text { Arnold } & \text { Acorn Corporation } \
\hline \$ 10,000 \text { dividend } & \$ 8,000 \text { capital gain } \
\hline
\end{array}$$ 
D)  $$\begin{array} { | l | l | } 
\hline \text { Arnold } & \text { Acorn Corporation } \
\hline 10,000 \text { dividend } & \$ 10,000 \text { dividend } \
\hline
\end{array}$$ 
A)  $$\begin{array} { | l | l | } 
\hline\text { Arnold } & \text { Acorn Corporation } \
\hline \$ 8,000 \text { capital gain } & \$ 8,000 \text { capital gain } \
\hline
\end{array}$$ 
B)  $$\begin{array} { | l | l | } 
\hline\text { Arnold } & \text { Acorn Corporation } \
\hline 88,000 \text { capital gain } & \$ 10,000 \text { dividend } \
\hline
\end{array}$$ 
C)  $$\begin{array} { | l | l | } 
\hline\text { Arnold } & \text { Acorn Corporation } \
\hline \$ 10,000 \text { dividend } & \$ 8,000 \text { capital gain } \
\hline
\end{array}$$ 
D)  $$\begin{array} { | l | l | } 
\hline \text { Arnold } & \text { Acorn Corporation } \
\hline 10,000 \text { dividend } & \$ 10,000 \text { dividend } \
\hline
\end{array}$$

Question 5

Which of the following statements best describes a bootstrap acquisition?

Accepted Answer

A) The shareholder sells part of his or her stock to a purchaser and then the corporation redeems the original shareholder's remaining stock. 
B) The shareholder sells his stock in exchange for cash and debt. 
C) The shareholder exchanges his stock for stock of a different corporation. 
D) none of the above 
A) The shareholder sells part of his or her stock to a purchaser and then the corporation redeems the original shareholder's remaining stock. 
B) The shareholder sells his stock in exchange for cash and debt. 
C) The shareholder exchanges his stock for stock of a different corporation. 
D) none of the above

Question 6

Hogg Corporation distributes $30,000 to its sole shareholder,Ima.At the time of the distribution,Hogg's E&P is $14,000 and Ima's basis in her stock is $10,000.Ima's gain from this transaction is a

Accepted Answer

A) $6,000 capital gain. 
B) $14,000 capital gain. 
C) $20,000 capital gain. 
D) $30,000 capital gain. 
A) $6,000 capital gain. 
B) $14,000 capital gain. 
C) $20,000 capital gain. 
D) $30,000 capital gain.

Question 7

Identify which of the following statements is true.

Accepted Answer

A) The distribution of preferred stock as a stock dividend will result in income or a taxable gain being recognized by the shareholder on the date of the distribution if the stock is Sec.306 stock. 
B) Corporations without E&P can distribute preferred stock as a stock dividend that is Sec.306 stock. 
C) Two corporations are considered to be brother-sister corporations for purposes of the Sec.304 redemption rules if one shareholder owns more than 50% of each corporation. 
D) All of the above are false. 
A) The distribution of preferred stock as a stock dividend will result in income or a taxable gain being recognized by the shareholder on the date of the distribution if the stock is Sec.306 stock. 
B) Corporations without E&P can distribute preferred stock as a stock dividend that is Sec.306 stock. 
C) Two corporations are considered to be brother-sister corporations for purposes of the Sec.304 redemption rules if one shareholder owns more than 50% of each corporation. 
D) All of the above are false.

Question 8

Joshua owns 100% of Steeler Corporation's stock.Joshua's basis in the stock is $8,000.Steeler Corporation has E&P of $40,000.If Steeler Corporation redeems 60% of Joshua's stock for $50,000,Joshua must report dividend income of

Accepted Answer

A) $0. 
B) $8,000. 
C) $40,000. 
D) $50,000. 
A) $0. 
B) $8,000. 
C) $40,000. 
D) $50,000.

Question 9

Identify which of the following statements is true.

Accepted Answer

A) 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. 
B) Waiver of the Sec.318 family attribution rules is permitted for all related party stock transactions. 
C) For a redemption to be essentially equivalent to a dividend,the shareholder must not have control of the corporation immediately following the redemption. 
D) All of the above are false. 
A) 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. 
B) Waiver of the Sec.318 family attribution rules is permitted for all related party stock transactions. 
C) For a redemption to be essentially equivalent to a dividend,the shareholder must not have control of the corporation immediately following the redemption. 
D) All of the above are false.

Question 10

Identify which of the following statements is true.

Accepted Answer

A) The holding period for property received by a shareholder in a nonliquidating distribution begins on the day after the distribution. 
B) When making a nonliquidating distribution,a corporation recognizes gains and losses. 
C) When making a nonliquidating distribution,the corporation's E&P is reduced by the property's FMV even though the property's basis is greater than its FMV. 
D) All of the above are false. 
A) The holding period for property received by a shareholder in a nonliquidating distribution begins on the day after the distribution. 
B) When making a nonliquidating distribution,a corporation recognizes gains and losses. 
C) When making a nonliquidating distribution,the corporation's E&P is reduced by the property's FMV even though the property's basis is greater than its FMV. 
D) All of the above are false.

Question 11

Corporations recognize gains and losses on the distribution of property to shareholders if the property's fair market value differs from its basis.

Accepted Answer

A) True 
 B)False

Question 12

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 13

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 14

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. $$\begin{array} { | l | r | } 
\hline \text { Date } & \text { Amount Distributed } \
\hline \text { April 1 } & \$ 20,000 \
\hline \text { Tune 1 } & 20,000 \
\hline \text { August 1 } & 15,000 \
\hline \text { November 1 } & 5,000 \
\hline
\end{array}$$ The treatment of the $15,000 August 1 distribution would be

Accepted Answer

A) $15,000 is taxable as a dividend; $5,000 from current E&P and the balance from accumulated E&P. 
B) $15,000 is taxable as a dividend from accumulated E&P. 
C) $4,000 is taxable as a dividend from accumulated E&P,and $11,000 is tax-free as a return of capital. 
D) $5,000 is taxable as a dividend from current E&P,and $10,000 is tax-free as a return of capital. 
A) $15,000 is taxable as a dividend; $5,000 from current E&P and the balance from accumulated E&P. 
B) $15,000 is taxable as a dividend from accumulated E&P. 
C) $4,000 is taxable as a dividend from accumulated E&P,and $11,000 is tax-free as a return of capital. 
D) $5,000 is taxable as a dividend from current E&P,and $10,000 is tax-free as a return of capital.

Question 15

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

Accepted Answer

A) $0. 
B) $28,000. 
C) $40,000. 
D) $48,000. 
A) $0. 
B) $28,000. 
C) $40,000. 
D) $48,000.

Question 16

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

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Blast Corporation manufactures purses and make-up kits.The corporation decides to quit manufacturing purses and distributes the assets associated with this division to its shareholders.The distribution of the these assets will be treated as a partial liquidation if

Accepted Answer

A) the corporation so elects. 
B) the corporation discontinues the line of business and the transaction is "essentially equivalent to a dividend." 
C) the distribution is made within 24 months of the adoption of a plan of liquidation and the transaction is "not essentially equivalent to a dividend." 
D) the distribution is "not essentially equivalent to a dividend" and is made within the year a plan of liquidation is adopted or within the succeeding year. 
A) the corporation so elects. 
B) the corporation discontinues the line of business and the transaction is "essentially equivalent to a dividend." 
C) the distribution is made within 24 months of the adoption of a plan of liquidation and the transaction is "not essentially equivalent to a dividend." 
D) the distribution is "not essentially equivalent to a dividend" and is made within the year a plan of liquidation is adopted or within the succeeding year.

Question 19

Identify which of the following statements is true.

Accepted Answer

A) Generally in a stock redemption,if the shareholder's ownership percentage is substantially reduced,the redemption is treated as a sale. 
B) The family attribution rules of Sec.318 are as inclusive as the family attribution rules of Sec.267. 
C) A 10% shareholder of a corporation is considered to own 10% of any stock that is owned by the corporation under the Sec.318 attribution rules. 
D) All of the above are false. 
A) Generally in a stock redemption,if the shareholder's ownership percentage is substantially reduced,the redemption is treated as a sale. 
B) The family attribution rules of Sec.318 are as inclusive as the family attribution rules of Sec.267. 
C) A 10% shareholder of a corporation is considered to own 10% of any stock that is owned by the corporation under the Sec.318 attribution rules. 
D) All of the above are false.

Question 20

Current E&P does not include

Accepted Answer

A) tax-exempt interest income. 
B) life insurance proceeds where the corporation is the beneficiary. 
C) federal income tax refunds from prior years. 
D) All of the above are included. 
A) tax-exempt interest income. 
B) life insurance proceeds where the corporation is the beneficiary. 
C) federal income tax refunds from prior years. 
D) All of the above are included.

Exam 4: Corporate Nonliquidating Distributions

Corporate distributions that exceed earnings and profits are always capital gains.

What is a stock redemption? What are some of the reasons for making a stock redemption? Why are some redemptions treated as sales and others as dividends?

Which of the following statements best describes a bootstrap acquisition?

Hogg Corporation distributes $30,000 to its sole shareholder,Ima.At the time of the distribution,Hogg's E&P is $14,000 and Ima's basis in her stock is $10,000.Ima's gain from this transaction is a

Identify which of the following statements is true.

Joshua owns 100% of Steeler Corporation's stock.Joshua's basis in the stock is $8,000.Steeler Corporation has E&P of $40,000.If Steeler Corporation redeems 60% of Joshua's stock for $50,000,Joshua must report dividend income of

Identify which of the following statements is true.

Identify which of the following statements is true.

Corporations recognize gains and losses on the distribution of property to shareholders if the property's fair market value differs from its basis.

Identify which of the following statements is true.

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

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

Identify which of the following statements is true.

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

Blast Corporation manufactures purses and make-up kits.The corporation decides to quit manufacturing purses and distributes the assets associated with this division to its shareholders.The distribution of the these assets will be treated as a partial liquidation if

Identify which of the following statements is true.

Current E&P does not include

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

U.S. Taxation of Foreign-Related Transactions

an Introduction to Taxation

Determination of Tax

Gross Income: Inclusions

Gross Income: Exclusions

Property Transactions: Capital Gains and Losses

Deductions and Losses

Business Expenses and Deferred Compensation

Itemized Deductions

Losses and Bad Debts

Depreciation,cost Recovery,amortization,and Depletion

Accounting Periods and Methods

Property Transactions: Nontaxable Exchanges

Property Transactions: Sec1231 and Recapture

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

Tax Research

Corporations

Partnerships and S Corporations

Taxes and Investment Planning

Filters