Question 1

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 2

Digger Corporation has $50,000 of current and accumulated E&P.On March 1,Digger distributes land with a $30,000 FMV and a $17,500 adjusted basis to Dave,its sole shareholder.The land is subject to a $5,000 liability which Dave assumes.
a)What are the amount and character of the distribution?
b)What is Dave's basis in the property?
c)When does his holding period for the property begin?

Accepted Answer

a)The distribution amount is $25,000 ($3

Question 3

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

Accepted Answer

A) The corporation recognizes a gain or loss as if it had sold the distributed property for its FMV immediately before the redemption. 
B) If the redemption is treated as a dividend,E&P is reduced in the same manner as for a regular dividend. 
C) If the redemption is treated as a sale,only accumulated earnings and profits is reduced. 
D) All of the above are correct. 
A) The corporation recognizes a gain or loss as if it had sold the distributed property for its FMV immediately before the redemption. 
B) If the redemption is treated as a dividend,E&P is reduced in the same manner as for a regular dividend. 
C) If the redemption is treated as a sale,only accumulated earnings and profits is reduced. 
D) All of the above are correct.

Question 4

On April 1,Delta Corporation distributes $120,000 in cash to each of its two equal shareholders,Sarah and Matt.At the time of the distribution,Delta's E&P is $160,000.Sarah's basis in her stock is $50,000 and Matt's basis in his stock is $20,000.How are the distributions characterized to Sarah and Matt? Be specific.

Accepted Answer

Sarah and Matt must each recognize $80,0

Question 5

Tia owns 2,000 shares of Bass Corporation common stock with an $80,000 basis.Bass distributes a nontaxable preferred stock dividend.When the preferred stock is distributed,it has an FMV of $60,000 and the FMV of the 2,000 common stock shares is $180,000.The basis of the preferred stock is

Accepted Answer

A) $0. 
B) $20,000. 
C) $60,000. 
D) $80,000. 
A) $0. 
B) $20,000. 
C) $60,000. 
D) $80,000.

Question 6

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

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

Wills Corporation,which has accumulated a current E&P totaling $70,000,distributes land to its sole shareholder,an individual.The land has an FMV of $75,000 and an adjusted basis of $60,000.The shareholder assumes a $15,000 liability associated with the land.The transaction will have the following tax consequences.

Accepted Answer

A) The corporation will recognize a $15,000 gain; the shareholder will recognize dividend income of $75,000. 
B) The corporation will recognize no gain; the shareholder will recognize dividend income of $75,000. 
C) The corporation will recognize a $15,000 gain; the shareholder will recognize dividend income of $60,000. 
D) The corporation will recognize no gain; the shareholder will recognize dividend income of $60,000. 
A) The corporation will recognize a $15,000 gain; the shareholder will recognize dividend income of $75,000. 
B) The corporation will recognize no gain; the shareholder will recognize dividend income of $75,000. 
C) The corporation will recognize a $15,000 gain; the shareholder will recognize dividend income of $60,000. 
D) The corporation will recognize no gain; the shareholder will recognize dividend income of $60,000.

Question 9

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

Accepted Answer

Usually at year-end.However,if

Question 10

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

Accepted Answer

A) charitable contribution in excess of the 10% limitation 
B) capital losses in excess of capital gains 
C) life insurance premiums (in excess of the increase in cash surrender value for the policy)paid on the lives of key employees 
D) dividends-received deduction 
A) charitable contribution in excess of the 10% limitation 
B) capital losses in excess of capital gains 
C) life insurance premiums (in excess of the increase in cash surrender value for the policy)paid on the lives of key employees 
D) dividends-received deduction

Question 11

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

Accepted Answer

A) $5,000. 
B) $15,000. 
C) $20,000. 
D) $60,000. 
A) $5,000. 
B) $15,000. 
C) $20,000. 
D) $60,000.

Question 12

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 $104,0

Question 13

Wills Corporation,which has accumulated a current E&P totaling $65,000,distributes land to its sole shareholder,an individual.The land has an FMV of $75,000 and an adjusted basis of $55,000.The shareholder assumes a $15,000 liability associated with the land.The shareholder will recognize

Accepted Answer

A) $60,000 of dividend income and have a $60,000 basis in the land. 
B) $65,000 of dividend income and have a $75,000 basis in the land. 
C) $60,000 of dividend income and have a $75,000 basis in the land. 
D) $65,000 of dividend income and have a $65,000 basis in the land. 
A) $60,000 of dividend income and have a $60,000 basis in the land. 
B) $65,000 of dividend income and have a $75,000 basis in the land. 
C) $60,000 of dividend income and have a $75,000 basis in the land. 
D) $65,000 of dividend income and have a $65,000 basis in the land.

Question 14

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 inte

Question 15

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

Accepted Answer

A) $4,100 dividend and a $6,900 capital gain. 
B) $11,000 return of capital. 
C) $4,100 dividend and a $6,900 tax free return of capital. 
D) $8,000 dividend and a $3,000 return of capital. 
A) $4,100 dividend and a $6,900 capital gain. 
B) $11,000 return of capital. 
C) $4,100 dividend and a $6,900 tax free return of capital. 
D) $8,000 dividend and a $3,000 return of capital.

Question 16

How does a shareholder classify a distribution for tax purposes?

Accepted Answer

Distributions are treated as f

Question 17

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 18

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 19

Dixie Corporation distributes $31,000 to its sole shareholder,Sally.At the time of the distribution,Dixie's E&P is $25,000 and Sally's basis in her Dixie stock is $10,000.Sally's basis in her Dixie stock after the distribution is

Accepted Answer

A) $4,000. 
B) $10,000. 
C) $25,000. 
D) $31,000. 
A) $4,000. 
B) $10,000. 
C) $25,000. 
D) $31,000.

Question 20

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.

Accepted Answer

A) True 
 B)False

Exam 4: Corporate Nonliquidating Distributions

Identify which of the following increases Earnings & Profits.

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

Tia owns 2,000 shares of Bass Corporation common stock with an $80,000 basis.Bass distributes a nontaxable preferred stock dividend.When the preferred stock is distributed,it has an FMV of $60,000 and the FMV of the 2,000 common stock shares is $180,000.The basis of the preferred stock is

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.

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

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

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

Wills Corporation,which has accumulated a current E&P totaling $65,000,distributes land to its sole shareholder,an individual.The land has an FMV of $75,000 and an adjusted basis of $55,000.The shareholder assumes a $15,000 liability associated with the land.The shareholder will recognize

How does a shareholder classify a distribution for tax purposes?

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

Dixie Corporation distributes $31,000 to its sole shareholder,Sally.At the time of the distribution,Dixie's E&P is $25,000 and Sally's basis in her Dixie stock is $10,000.Sally's basis in her Dixie stock after the distribution is

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.

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