Exam 19: Corporations: Distributions Not in Complete Liquidation

On January 1, Gold Corporation (a calendar year taxpayer) has E & P of $30,000 and generates no additional E & P during the year. On March 31, the corporation distributes $40,000 to its sole shareholder, Ava (basis in stock of $8,000). Determine the effect of the distribution on Ava's taxable income and stock basis.

Timothy owns 100% of Forsythia Corporation's stock. Corporate employees and annual salaries include Timothy ($300,000)? Richard, Timothy's son ($80,000)? Rita, Timothy's daughter ($100,000)? and Sandy ($120,000). The operation of Forsythia Corporation is shared about equally between Timothy and Sandy (an unrelated party). Richard and Rita are full-time college students at a university about 150 miles away. Forsythia Corporation has substantial E & P but has not distributed a dividend for the past five years. Discuss problems related to the salary arrangement for Forsythia Corporation.

A shareholder's basis in property acquired in a stock redemption is the property's fair market value as of the date of redemption.

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 -Section 179 expense in second year following election.

Leon owns 750 shares of the 2,000 outstanding shares of Crane Corporation (E & P of $900,000). None of the other shareholders of Crane are related to Leon. Leon acquired his Crane shares ten years ago for $80,000. Crane has operated several trades or businesses for more than five years. In the current year, Crane sells the assets of one of those trades or businesses and distributes the proceeds from the asset sale to the shareholders in a pro rata stock redemption. In this transaction, Leon receives $250,000 in redemption of 300 shares of Crane. As a result of this transaction, Leon will recognize:

The dividends received deduction has no impact on E & P.

Starling Corporation was organized fifteen years ago to construct office furniture. Eight years ago, Starling began a fast food business. In the current year, Starling discontinues its fast food business and sells all of the assets used in that business for $2 million. Further, Starling distributes the entire sales proceeds in a pro rata redemption of 250 shares of stock from each of its two equal shareholders-Morgan, an individual, and Magpie Corporation. Morgan has a basis of $100,000 in her redeemed stock, Magpie Corporation has a basis of $125,000 in its redeemed stock, and both shareholders have held their stock interest in Starling for several years. Starling Corporation has E & P of $4 million and 2,000 shares outstanding at the time of the distribution. What are the tax consequences of the stock redemption to Morgan, to Magpie Corporation, and to Starling Corporation?

Dividends taxed as ordinary income are considered investment income for purposes of the investment interest expense limitation.

What is a constructive dividend? Provide several examples of the term.

Lena is the sole shareholder and president of Gold Corporation. She feels that she can justify at least a $50,000 bonus this year because of her performance for the company. However, rather than a bonus in the form of a salary, she considers having Gold pay her a $50,000 dividend. She believes this would be preferable because it will be taxed at only 15% instead of her marginal rate of 35%. Her CPA has advised her to pay a $75,000 bonus in lieu of the $50,000 dividend. Assuming that Gold Corporation is in a 34% tax bracket, should Lena take the $50,000 dividend or the $75,000 bonus? Support your answer by computing the after-tax cost of the two alternatives to Gold and to Lena.

Federal income tax paid in the current year must be subtracted from taxable income to determine E & P.

Jen, the sole shareholder of Mahogany Corporation, sold her stock to Jason on July 1 for $90,000. Jen's stock basis at the beginning of the year was $60,000. Mahogany made a $30,000 cash distribution to Jen immediately before the sale, while Jason received a $60,000 cash distribution from Mahogany on November 1. As of the beginning of the current year, Mahogany had $16,000 in accumulated E & P, while current E & P (before distributions) is $30,000. What are the tax consequences of these transactions to Jen and Jason?

Certain dividends from foreign corporations can be qualified dividends for purposes of the preferential rate available to individuals.

The Code treats corporate distributions that are a return of a shareholder's investment as sales or exchanges and corporate distributions that are a return from a shareholder's investment as dividends.

Maria owns 75% and Christopher owns 25% of Cockatoo Corporation, a calendar year taxpayer. Cockatoo makes a $600,000 distribution to Maria on April 1 and a $200,000 distribution to Christopher on May 1. Cockatoo's current E & P is $120,000 and its accumulated E & P is $500,000. What are the tax implications of the distributions to Maria and Christopher?

A distribution in excess of E & P is treated as capital gain by shareholders.

In the current year, Quail Corporation distributed installment notes payable in redemption of some of its shares. Quail incurred the following expenditures in connection with the redemption: accounting fees of $7,000 and legal fees of $8,000. In addition, Quail paid $10,000 of interest expense on the installment notes payable. The distribution was a qualifying stock redemption. How much of the $25,000 is deductible in the current year?

Stephanie is the sole shareholder and president of Hawk Corporation. She feels that she can justify at least a $220,000 bonus this year because of her performance. However, rather than a bonus in the form of a salary, she plans to have Hawk pay her a $220,000 dividend. Because Stephanie's marginal tax rate is 32%, she prefers to receive a dividend taxed at 15%. Her accountant, however, suggests a $275,000 bonus in lieu of the $220,000 dividend since Hawk Corporation is in the 21% tax bracket. Should Stephanie take the $220,000 dividend or the $275,000 bonus? Support your answer by computing the after-tax cost of the two alternatives to Hawk and to Stephanie.

Which one of the following statements about property distributions is false?

Puffin Corporation makes a property distribution to its sole shareholder, Bonnie. The property distributed is a car (basis of $30,000? fair market value of $20,000) that is subject to a $6,000 liability which Bonnie assumes. Puffin has no accumulated E & P and $30,000 of current E & P from other sources during the year. What is Puffin's E & P after taking into account the distribution of the car?