Exam 4: Corporate Nonliquidating Distributions

Rose has a $20,000 basis in the 60% of the Parent Corporation stock that she owns.Parent Corporation owns a 70% interest in Child Corporation.Parent and Child have current and accumulated E&P balances of $25,000 and $40,000,respectively.In return for $15,000,Rose sells 10% of the Parent Corporation stock to Child Corporation.What is the impact of the transaction on Rose?

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.

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

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 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 false.

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.

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

Identify which of the following statements is true.

Strong Corporation is owned by a group of 20 shareholders.During the current year,Strong Corporation pays $225,000 in salary and bonuses to Stedman,its president and controlling shareholder.The IRS audits Strong's tax return and determines that reasonable compensation for Stedman would be $125,000.Strong Corporation agrees to the adjustment. a)What effect does the disallowance of part of the deduction for Stedman's salary and bonuses have on Strong Corporation and Stedman? b)What tax savings could have been obtained by Strong Corporation and Stedman if an agreement had been in effect that required Stedman to repay Strong Corporation any amounts determined by the IRS to be unreasonable?

River Corporation's taxable income is $25,000,after deducting a $5,000 NOL carryover from last year and after claiming a $10,000 dividends-received deduction.What is the current E&P?

Identify which of the following statements is false.