Exam 19: Corporations: Distributions Not in Complete Liquidation

Grackle Corporation (E & P of $600,000) distributes cash of $200,000 and land (fair market value of $400,000? basis of $250,000) to a shareholder in a qualifying stock redemption. The land distributed is subject to a mortgage of $460,000. Grackle will recognize a gain of $210,000 as a result of the distribution.

Ethel, Hannah, and Samuel, unrelated individuals, own the stock in Broadbill Corporation (E & P of $700,000) as follows: Ethel, 300 shares? Hannah, 300 shares? and Samuel, 400 shares. Broadbill redeems 200 of Samuel's shares (basis of $175,000) for $250,000. If Samuel's stock is a capital asset and has been held for over three years, Samuel has:

Which one of the following statements is false?

Cedar Corporation is a calendar year taxpayer formed in 2014. Cedar's E & P before distributions for each of the past 5 years is listed below. 2018 $28,000 2017 $40,000 2016 $39,000 2015 $68,000 2014 $16,000 Cedar Corporation made the following distributions in the previous 5 years. 2017 Land (basis of $70,000, fair market value of $80,000) 2014 $20,000 cash Cedar's accumulated E & P as of January 1, 2019 is:

Distributions by a corporation to its shareholders are presumed to be a dividend unless the parties can prove otherwise.

Briefly define the term "earnings and profits."

Provide a brief outline on computing current E & P.

In June of the current year, Marigold Corporation declares a $4 dividend out of E & P on each share of common stock to shareholders of record on August 1. Ellen and Tim each purchase 100 shares of Marigold stock on July 1. On July 15, Ellen also purchases a short position in Marigold. Tim sells 50 of his shares on August 10 and continues to hold the remaining 50 shares through the end of the year. Ellen closes her short position in Marigold on October 15. With respect to the dividends, which of the following is correct?

As a result of a redemption, a shareholder's interest (direct and indirect) in the corporation decreased from 80% to 55%. The redemption qualifies for sale or exchange treatment as a disproportionate redemption.

Which of the following is not a consequence of the double tax on dividends?

An increase in the LIFO recapture amount must be added to taxable income to determine E & P.

When does a redemption qualify as a not essentially equivalent redemption under § 302(b)(1)?

When computing E & P, taxable income is not adjusted for § 179 expense.

The stock of Tan Corporation (E & P of $1.5 million) is owned as follows: 90% by Egret Corporation (basis of $900,000), and 10% by Zoe (basis of $70,000). Both shareholders acquired their shares in Tan more than six years ago. In the current year, Tan Corporation liquidates and distributes land (fair market value of $1.1 million, basis of $1.3 million) and equipment (fair market value of $700,000, basis of $410,000) to Egret Corporation, and securities (fair market value of $200,000, basis of $260,000) to Zoe. What are the tax consequences of these distributions to Egret, to Tan, and to Zoe?

Goldfinch Corporation distributes stock rights to its shareholders. How is the basis of the stock rights received by Goldfinch's shareholders determined?

When current E & P is positive and accumulated E & P has a deficit balance, the two accounts are netted for dividend determination purposes.

To determine E & P, some (but not all) previously excluded income items are added back to taxable income.

Hazel, Emily, and Frank, unrelated individuals, own all of the stock in Wren Corporation (E & P of $1.2 million) as follows: Hazel, 1,500 shares? Emily, 300 shares? and Frank, 200 shares. Wren redeems 900 of Hazel's shares (basis of $210,000) for $625,000. With respect to the distribution in redemption of the stock:

Julian, Berta, and Maria own 400 shares, 400 shares, and 200 shares, respectively, in Caramel Corporation (E & P of $750,000). Berta is Julian's sister, and Maria is Julian's aunt. Caramel Corporation redeems all of Julian's stock for $420,000. Julian paid $200 a share for the stock five years ago. Julian continued to serve on Caramel's board of directors after the redemption. With respect to the redemption:

Blue Corporation has a deficit in accumulated E & P of $300,000 and has current E & P of $225,000. On July 1, Blue distributes $250,000 to its sole shareholder, Sam, who has a basis in his stock of $52,500. As a result of the distribution, Sam has: