Deck 3: Corporate Distributions: Cash, Property, and Stock Dividends

Question 1

It is possible for a corporation to pay a taxable dividend even though there is a deficit in accumulated earnings and profits.

Answer 1

True

Question 2

During the year, C Corporation distributed land worth $30,000 to its sole shareholder, S.The corporation acquired the property five years ago for $50,000.C recognizes a loss of $20,000 on the distribution of the land.

Answer 2

False

Question 3

The General Utilities doctrine is consistent with the theory of double taxation.

Answer 3

False

Question 4

T received a distribution with respect to his stock of $50,000.The corporation had neither accumulated nor current earnings and profits.T is entitled to recover his basis before he reports any gain or income because of the distribution.

Question 5

During the year, Y Corporation distributed property worth $10,000 (basis $6,000) to its sole shareholder, R.If R assumes a liability to which the property is subject, both the amount of the distribution and the basis of the property will be affected.

Question 6

During the year, F Corporation sold a parcel of land that it purchased several years ago for $10,000.F received $20,000 in cash and an $80,000 note payable in eight annual installments beginning next year.With respect to this sale, F must increase its E&P by $90,000 .

Question 7

J Corporation had current earnings and profits of $10,000 and accumulated earnings and profits at the beginning of the year of $20,000.Assuming three equal distributions of $60,000 are made during the year, each distribution will be treated the same.

Question 8

G Corporation distributed its own bonds to its shareholders as a dividend.The bonds had a face value of $100,000.However, because the interest rate on the bonds at the date of issue was below the market rate of interest, the bonds were worth $90,000.G must reduce its E&P by $90,000.

Question 9

F Corporation distributed to its sole shareholder land worth $50,000.The land had a basis of $40,000 and was subject to a mortgage of $20,000.F must decrease its E&P by $30,000.

Question 10

Unlike other nondeductible expenses, Federal income taxes may not be deducted in computing E&P.

Question 11

During the year, T borrowed $7,000 from his wholly owned corporation.The loan was interest-free.Under the operable Code section, T will automatically be deemed to have received a dividend for the interest that he was not charged.

Question 12

Dividends must be formally declared by the corporation's board of directors before they will be treated as a dividend for tax purposes.

Question 13

A corporation's balance in its earnings and profits account is equivalent in amount to the balance in its retained earnings account.

Question 14

During the year, DEF Corporation distributed land that it had used as a parking lot in its business (value $40,000, basis $5,000).DEF will recognize gain on the distribution.

Question 15

D Corporation distributed to its sole shareholder a truck worth $5,000 (basis $3,000).The net effect of the distribution on D's E&P (ignoring taxes) is a reduction of $3,000.

Question 16

R owns 100 percent of F Corporation.In computing earnings and profits, artificial deductions such as the dividends-received deduction are not allowed.Capital losses, including a loss on the sale of property to R, however, are considered true economic losses and reduce earnings and profits even though such losses are not deductible in computing taxable income.

Question 17

The General Utilities doctrine stands for the proposition that the corporation does not recognize gain on the distribution of property.

Question 18

During the year, X Corporation distributed $25,000 on March 1 and $75,000 on October 1.As long as X Corporation has accumulated earnings and profits of at least $100,000 at the beginning of the year, both distributions will be treated as dividends.

Question 19

During the year, T Corporation distributed property to its sole shareholder.T must recognize any gain or loss realized on the distribution.

Question 20

Distributing Corporation purchased land for $50,000 several years ago.The value of the land has since declined because the adjacent land has been chosen as the site of a toxic waste dump.Good planning would suggest that instead of selling the land and distributing the proceeds, the corporation should distribute the land to its shareholders and allow them to sell it.(Ignore any possible assignment of income problems.)

Question 21

This year, Corporation Z distributed land held for investment to its sole individual shareholder.The land was worth $100,000 (basis $70,000) and was subject to a liability of $40,000.Assuming the corporation has substantial earnings and profits, and ignoring the effect of any taxes on the distribution, the net effect of the transaction on E&P will be a decrease of

A)$30,000
B)$100,000
C)$70,000
D)$60,000
E)$40,000

Question 22

Normally, a stock dividend is nontaxable as long as it does not change the proportionate interests of the shareholders.

Question 23

ABC Corporation's beginning balance of accumulated earnings and profits is a deficit of $100,000 and had current earnings and profits of $20,000.On March 1, the corporation distributed $45,000 to its sole shareholder, R, who had a basis in his stock of $30,000.R will report

A)No dividend income and a capital gain of $15,000
B)A dividend of $20,000
C)A dividend of $20,000 and a capital gain of $25,000
D)No dividend income and a capital gain of $25,000
E)None of the above

Question 24

The basic rules governing distributions contained in $ 301 cover the distributions of all property to a shareholder, including all of those items below except

A)Money
B)Equipment
C)The corporation's own bonds
D)The corporation's own stock
E)All of the above

Question 25

JKL Corporation had a balance of $25,000 in accumulated earnings and profits at the beginning of the year.Its current earnings and profits for the year were $10,000.During the year, JKL made two distributions: $30,000 on June 1 and $20,000 on October 1.The distribution on October 1 represents a dividend of

A)$0
B)$4,000
C)$5,000
D)$14,000
E)None of the above

Question 26

The net effect on E&P in all of the following cases is a net decrease equal to the adjusted basis of the distributed property except for a distribution of

A)The corporation's own bonds
B)Land that has declined in value relative to its purchase price
C)Land that has appreciated relative to its purchase price
D)Valuable equipment that has been completely depreciated

Question 27

A distribution of preferred stock on common stock is taxable because the distribution ultimately changes the interest of the common shareholder.

Question 28

RST Corporation declared a dividend this year.The dividend was payable in RST stock worth $40 per share, or the shareholders could elect to receive cash of $40.B received stock and C elected to receive cash.B's dividend is nontaxable, whereas C's dividend is taxable.

Question 29

For which of the following items would an adjustment to taxable income not be required in computing earnings and profits?

A)Federal income taxes
B)State of Indiana income taxes
C)Attorney's fee for drafting articles of incorporation
D)Interest on City of Houston bonds
E)Depreciation using the accelerated percentages of ACRS

Question 30

XYZ Corporation reported taxable income of $91,500 for the current year.It has provided the following information for use in computing earnings and profits: Dividends received (from 45% corporation) $10,000
Interest from tax-exempt municipal bonds 2,000
Depreciation, using accelerated cost recovery percentages under MACRS (straight line, using ADS would have been $12,000) 15,000
Long-term capital gain 8,000
The corporation's current earnings and profits before considering taxes is

A)$99,500
B)$104,500
C)$106,500
D)$102,500

Question 31

During the year, T Corporation distributed land used in its business to its sole shareholder.The land was worth $50,000 (basis, $10,000).Assuming the corporation has substantial earnings and profits, and ignoring the effect of any taxes on the distribution, the net effect of the transaction on E&P will be

A)An increase of $40,000
B)A decrease of $50,000
C)An increase of $10,000
D)A decrease of $10,000
E)None of the above

Question 32

T was granted one right for each share of stock that she owned.She elected to allocate basis to the stock rights.T was unwilling to exercise the rights to buy new stock because of the outlook for the company, and consequently they lapsed.Despite her views on the company's future, she continued to hold her original stock.She is not allowed to deduct a loss equal to the basis assigned to the rights.

Question 33

HIJ Corporation had a balance of $100,000 in accumulated earnings and profits at the beginning of the year.During the current year it had a deficit in current earnings and profits of $73,000, which was attributable to poor performance throughout the year.The corporation made two distributions during the year: $60,000 on February 1 and $40,000 on December 1.The distributions will be treated as follows:

A)A maximum of $27,000 of the distributions will be treated as a dividend.
B)A portion of both the first and second distribution will be treated as a dividend.
C)Only the first distribution will give rise to dividend income.
D)Neither of the distributions will give rise to dividend income, since there are no current earnings and profits.
E)None of the above is true.

Question 34

R received a distribution with respect to his stock during the past year.He should treat the amount received

A)First as a nontaxable return of capital to the extent of his basis and then a taxable dividend distribution to the extent that any earnings and profits exist
B)First as a taxable dividend distribution to the extent that any earnings and profits exist and then a nontaxable return of capital to the extent of his basis
C)Fully taxable as ordinary income without regard to his basis or the corporation's earnings and profits
D)None of the above

Question 35

During the year, P&B Construction Corp.distributed a crane used in its business to S, who owns 100 percent of the stock.The crane was worth $10,000 and had a basis of $19,000.The corporation also distributed land worth $70,000 (basis $40,000).Assuming P&B has substantial earnings and profits, the corporation will report

A)No gain or loss
B)$30,000 gain
C)$9,000 loss
D)$21,000 gain
E)None of the above

Question 36

Which of the following statements best describes accumulated earnings and profits?

A)Retained earnings as determined for financial accounting purposes and adjusted for distributions
B)Accumulated taxable income of prior years and adjusted for distributions
C)Accumulated net income as determined for financial accounting purposes for prior years and adjusted for distributions
D)Accumulated economic income that can be distributed without impairing capital

Question 37

This year A&S Disposal Corp.distributed land that it had used as a garbage site to its sole shareholder, J.The land was worth $30,000 (basis $10,000) and was subject to a $16,000 mortgage, which J assumed.The corporation had $200,000 of earnings and profits.Ignoring any taxes that may or may not arise on the distribution, the net effect of the distribution on earnings and profits of A&S will cause it to

A)Increase by $20,000
B)Decrease by $10,000
C)Increase by $6,000
D)Increase by $10,000
E)None of the above

Question 38

T Inc.distributed land used in its business worth $21,000 (basis $18,000) to its sole shareholder, Z Corporation.The land was subject to a mortgage of $5,000.Assuming T has substantial earnings and profits, Z's dividend and basis for the property will be

A)$21,000 dividend, $ 16,000 basis
B)$ 16,000 dividend, $ 16,000 basis
C)$21,000 dividend, $21,000 basis
D)$16,000 dividend, $21,000 basis
E)None of the above

Question 39

Assuming current earnings and profits are computed by making certain modifications to current taxable income, which of the following is false?

A)An adjustment is required if the corporation maintains its inventory using the LIFO method.
B)No adjustment is needed if capital losses exceed capital gains.
C)An adjustment is required when the installment sales method is elected.
D)An adjustment is required when the corporation sells property to its sole shareholder at a loss.
E)An adjustment is necessary if MACRS is used.

Question 40

S Corporation distributed land used in its business worth $30,000 (basis $5,000) to its sole shareholder, G.Assuming S has substantial earnings and profits, G's dividend and basis for the property will be

A)$30,000 dividend, $30,000 basis
B)$5,000 dividend, $5,000 basis
C)$30,000 dividend, $5,000 basis
D)$5,000 dividend, $30,000 basis
E)None of the above

Question 41

In allocating current earnings and profits, the IRS has ruled that they are

A)Allocated pro rata to distributions on stock on which dividends are paid
B)Allocated pro rata to all distributions made during the year and within two months of the close of the year
C)First allocated to distributions on stock on which dividends must be paid before dividends can be paid on other classes of stock
D)First allocated to distributions on stock on which dividends may be paid after required dividends have been paid on other classes of stock

Question 42

Q Corporation files its tax return on the accrual basis and has a taxable income of $80,000.It files its tax return showing an income tax of $15,450.It sold securities yielding a net short-term capital loss of $30,000 during the tax year.Q Corporation's current earnings and profits, as calculated using these items only, would be

A)$64,550
B)$50,000
C)$80,000
D)$95,450
E)$34,550

Question 43

R Corporation files its tax return on a cash basis and has a taxable income of $50,000.It received a Federal income tax refund of $3,000.Interest income of $6,000 includes $2,000 that is tax-exempt.Payroll tax penalties of $250 were assessed and paid.R Corporation's current earnings and profits, as calculated using these items only, would be

A)$54,750
B)$56,750
C)$50,000
D)$52,000
E)$52,750

Question 44

M Corporation makes a distribution of $15,000 to its sole shareholder, Mr.Higgins.At the close of the year the corporation had $8,000 of accumulated and current earnings and profits.Mr.Higgins' basis in his stock is $5,000.He must report

A)$8,000 in dividends and $7,000 capital gains
B)$15,000 in dividends and no capital gains
C)$8,000 in dividends and $2,000 capital gains
D)$7,000 in dividends and $8,000 capital gains
E)$13,000 in dividends and $2,000 capital gains

Question 45

In 1986 the General Utilities doctrine was repealed, resulting in a complete revision of the treatment of the distributing corporation.As a result, corporations must

A)Recognize gain on the distribution of appreciated property distributed as a dividend
B)Recognize loss on the distribution of depreciated property distributed as a dividend
C)Recognize gain or loss on the distribution of property as a dividend
D)Defer gain or loss on the distribution of property as a dividend
E)None of the above

Question 46

B owns 100 shares of T Corporation common stock, which he acquired on June 1, 2004 for $800.On October 15 of this year he received a stock dividend of 25 shares of preferred worth $4 per share when the common was worth $1 per share.What is B's basis in his preferred stock and when does his holding period begin?

A)$640; June 1, 2004
B)$400; June 1, 2004
C)$100; October 15, this year
D)$640; October 15, this year
E)None of the above

Question 47

At the end of the taxable year B Corporation has current E&P of $50,000 without reduction for any distributions made during the year.The corporation also has accumulated E&P of $45,000.A distribution of $40,000 is made on May 1 and another distribution of $60,000 is made on December 1.B Corporation files on the accrual basis using a calendar year.The distributions are made to its sole shareholder.The amount of current E&P allocated to the May 1 distribution of $40,000 is

A)$20,000
B)$40,000
C)$33,333
D)$0
E)None of the above

Question 48

During the year, R and his wife S both received a distribution of stock from XYZ Corporation.R will report no dividend income

A)If the distribution is preferred stock on common
B)If the distribution is preferred on preferred
C)If he receives common while his wife receives preferre
D)More than one but less than all of the above
E)All of the above

Question 49

H Corporation distributed land with a fair market value of $100,000 (basis $20,000) to Y Corporation, a 70 percent shareholder.As a result, the amounts of the distribution to Y Corporation and basis of land to Y Corporation are

A)$80,000 and $80,000
B)$100,000 and $100,000
C)$100,000 and $20,000
D)$80,000 and $20,000

Question 50

Which of the following statements is false?

A)E&P consists of two basic parts: current E&P and accumulated E&P.
B)A corporation can make taxable dividend distributions if it has current E&P, notwithstanding the fact that it may have a deficit in accumulated E&P.
C)A dividend is defined as paid out of either current or accumulated E&P.
D)The presumption is that every distribution is first out of accumulated E&P and then from current E&P.

Question 51

At the end of the taxable year B Corporation has current E&P of $50,000 without reduction for any distributions made during the year.The corporation also has accumulated E&P of $45,000.A distribution of $40,000 is made on May 1 and another distribution of $60,000 is made on December 1.B Corporation files on the accrual basis using a calendar year.The distributions are made to its sole shareholder.The amount of accumulated E&P allocated to the December 1 distribution of $60,000 is

A)$50,000
B)$45,000
C)$0
D)$30,000
E)$25,000

Question 52

To avoid recharacterization as a dividend, an advance to a shareholder must represent a bona fide loan.A bona fide debtor-creditor relationship is generally suggested by

A)The advance being recorded on the books of the corporation and evidenced by a note
B)The shareholder making payments on the note according to a fixed schedule with the note bearing a reasonable charge for interest
C)The note being secured by collateral with the due dates for payments enforced
D)All of the above

Question 53

In year one W Corporation paid an annual premium of $6,000 on an insurance policy covering its president.The cash surrender value of the policy increased by $2,500.The policy has a $650,000 face value and lists W Corporation as the beneficiary.In year 10, when the cash surrender value of the policy has grown to $50,000, the president dies, before the corporation is required to pay the annual premium.Which statement(s) of the following is(are) true?

A)In year one, the net effect of the annual premium paid out and the increase to cash surrender value was a decrease to E&P of $3,500.
B)In year 10, the net effect of the annual premiums paid out and the increases to cash surrender value has been a decrease to E&P of $4,000.
C)In year 10, $650,000 will be received by the corporation tax-free, with $600,000 being added to E&P.
D)All of the above are true.
E)None of the above is true.