Exam 4: Corporate Nonliquidating Distributions

Bart,a 50% owner of Atlas Corporation's common stock,receives a distribution of a new class of Atlas preferred stock having a $40,000 FMV.Bart's basis in the Atlas common stock is $30,000.Its FMV is $80,000 on the distribution date.One year later,the corporation redeems the preferred stock for $75,000.At the time the stock was issued,the corporation's current and accumulated E&P was $80,000.At the end of the year of redemption,the current and accumulated E&P is $25,000.No other distributions out of E&P were made in the year of redemption.What are the tax consequences of the transaction?

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.

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.

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

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

Ameriparent Corporation owns a 70% interest in Flag Corporation.The corporations have current and accumulated E&Ps of $25,000 and $40,000,respectively.Taxpayer,who has a $20,000 basis in her 40% ownership interest of Ameriparent Corporation,sells sufficient stock to Flag to reduce her interest in Ameriparent from 40% to 20%.Taxpayer receives $20,000 for the stock she surrenders.What are the tax consequences of the transaction for Taxpayer?

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?

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

Which of the following requirements must be met for a redemption to be treated as substantially disproportionate?

One consequence of a property distribution by a corporation to a shareholder is that

Boxer Corporation buys equipment in January of the current year with a seven-year class life for $15,000.The corporation expensed the $15,000 under Sec.179.The deduction in the year of purchase for E&P purposes due to the acquisition and expensing of the equipment is

Rich owns 60 of the 100 outstanding shares of Rainbow Corporation's stock and 80 of the 100 outstanding shares of Oz Corporation's stock.Rich's basis in his Rainbow shares is $12,000,and his basis in his Oz shares is $8,000.Rich sells 30 of his Rainbow shares to Oz Corporation for $50,000.At the end of the year of the sale,Rainbow and Oz Corporations have E&Ps of $25,000 and $40,000,respectively. a)What is the amount and character of Rich's gain or loss? b)What is Rich's basis in his remaining shares of the Rainbow and Oz stock? c)How does the sale affect the E&Ps of Rainbow and Oz Corporations? d)What basis does Oz Corporation take in the Rainbow shares it purchases? e)How would your answer to part (a)change if Rich owns only 50 shares of the 100 outstanding shares of Oz Stock?

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

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?

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.

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

Splash Corporation has $50,000 of taxable income before any charitable contribution deduction.Splash contributed $20,000 to a qualified charitable organization.Due to the 10% of taxable income limitation on charitable contribution deductions,Splash's contribution deduction is limited to $5,000.What effect does the charitable contribution have on current and future E&P?

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?

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