Exam 19: Corporations: Distributions Not in Complete Liquidation

Tangelo Corporation has an August 31 year-end. Tangelo had $50,000 in accumulated E & P at the beginning of its 2019 fiscal year (September 1, 2018) and during the year, it incurred a $75,000 operating loss. It also distributed $65,000 to its sole shareholder, Cass, on November 30, 2018. If Cass is a calendar year taxpayer, how should she treat the distribution when she files her 2018 income tax return (assuming the return is filed by April 15, 2019)?

Finch Corporation (E & P of $400,000) distributed machinery ($10,000 adjusted basis, $150,000 fair market value) to its sole shareholder, Kathleen. The property is subject to a $50,000 mortgage, which Kathleen assumed. How much dividend income does Kathleen recognize as a result of the distribution and what is her basis in the machinery?

To carry out a qualifying stock redemption, Turaco Corporation (E & P of $800,000) transfers land held for investment purposes to Aida, a shareholder. The land had a basis of $250,000, a fair market value of $400,000, and is subject to a $300,000 liability. Aida has a basis of $70,000 in the shares redeemed. Which of the following is a correct statement regarding the tax consequences of this redemption?

The adjusted gross estate of Debra, decedent, is $16 million. Debra's estate will incur death taxes and funeral and administration expenses of $2 million. Debra's gross estate includes stock in Silver Corporation that she had purchased twelve years ago for $1.2 million (date of death fair market value of $6 million). At the time of her death, Debra owned 80% of the stock in Silver Corporation. Silver Corporation (E & P of $8 million) redeems all of the estate's stock in the corporation for $6 million. Debra's will names her daughter, Dena, who owns the remaining 20% interest in Silver Corporation, as her sole heir. With respect to this redemption, Debra's estate has the following income:

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2018. a. Increase b. Decrease c. No effect -Interest received from municipal bonds in 2018.

Hannah, Greta, and Winston own the stock in Redpoll Corporation (E & P of $900,000) as follows: Hannah, 600 shares? Greta, 400 shares? and Winston, 1,000 shares. Greta is Hannah's daughter, and Winston is Hannah's brother. Redpoll Corporation redeems 400 of Hannah's shares (basis of $55,000) for $240,000. Hannah purchased the stock three years ago as an investment. With respect to the stock redemption, Hannah has:

Constructive dividends have no effect on a distributing corporation's E & P.

Aaron and Michele, equal shareholders in Cavalier Corporation, receive $25,000 each in distributions on December 31 of the current year. During the current year, Cavalier sold an appreciated asset for $60,000 (basis of $15,000). Payment for the sale of the asset will be made as follows: 50% next year and 50% in the following year, with interest payable at a rate of 6 percent. Before considering the effect of the asset sale, Cavalier's current year E & P is $40,000 and it has no accumulated E & P. How much of Aaron's distribution will be taxed as a dividend?

Vireo Corporation redeemed shares from its sole shareholder pursuant to a written agreement between the parties that clearly identified the transaction as a stock redemption (and not a dividend distribution). Since the agreement is binding under state law, the shareholder will receive sale or exchange treatment with respect to the redemption.

The terms "earnings and profits" and "retained earnings" are identical in meaning.

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2018. a. Increase b. Decrease c. No effect -Premiums paid on key employee life insurance policy (assume no increase in cash surrender value of policy) in 2018.

Tanya is in the 32% tax bracket. She acquired 1,000 shares of stock in Swan Corporation seven years ago for $100 a share. In the current year, Swan Corporation (E & P of $1.2 million) redeems all of her shares for $160,000. What are the income tax consequences to Tanya if: a. The redemption qualifies for sale or exchange treatment, and Tanya has no other transactions in the current year involving capital assets? b. The redemption does not qualify for sale or exchange treatment?

The adjusted gross estate of Keith, decedent, is $24 million. Included in the gross estate is stock in Gold Corporation (E & P of $2.6 million), a closely held corporation, valued at $9.2 million as of the date of Keith's death. Keith had acquired the stock twelve years ago at a cost of $1.8 million. Death taxes and funeral and administration expenses for Keith's estate are $4.6 million. Gold Corporation redeems one-half of the stock from Keith's estate in a § 303 redemption to pay death taxes using property with a fair market value of $4.6 million (adjusted basis of $3.8 million). Which of the following is a correct statement regarding the tax consequences of this redemption?

Regardless of any deficit in current E & P, distributions during the year are taxed as dividends to the extent of accumulated E & P.

Keshia owns 200 shares in Parakeet Corporation. Keshia has a 30% beneficiary interest in her deceased grandmother's estate. The estate owns 400 shares in Parakeet Corporation. None of the other beneficiaries of the estate own stock in Parakeet. In applying the § 318 attribution rules:

In general, how are current and accumulated earnings and profits allocated to corporate distributions?

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2018. a. Increase b. Decrease c. No effect -Loss on sale between related parties in 2018.

When computing current E & P, taxable income must be adjusted for the deferred gain in a § 1031 like-kind exchange.

A deficit in current E & P is treated as occurring ratably during the year, unless the taxpayer can show otherwise.

Christian, the president and sole shareholder of Venture Corporation, is paid an annual salary of $150,000. Christian would like to draw additional funds from the corporation but is concerned that increased salary might cause the IRS to contend his salary is unreasonable. Further, Christian does not want the corporation to pay any dividends. He would like to contribute $40,000 to his alma mater to establish scholarships for needy students. If Christian makes a pledge to the university to provide $40,000 for scholarships, would there be a problem if Venture Corporation paid the pledge on his behalf? Explain.