Deck 7: Corporate Taxation: Non-Liquidating Distributions

Question 1

A distributionof cash from a corporation to a shareholder will always result in a dividend for tax purposes.

Answer 1

False

Question 2

Tammy owns 60 percent of the stock of Huron Corporation. Unrelated individuals own the remaining 40 percent. For a stock redemption of a portion of Tammy's shares to be treated as an exchange under the "substantially disproportionate" rule, the redemption must reduce Tammy's stock ownership in Huron Corporation below 48 percent.

Answer 2

True

Question 3

Terrapin Corporation incurs federal income taxes of $250,000 in 20X3. Terrapin deducts the federal income taxes in computing its current E&P for 20X3.

Answer 3

True

Question 4

Evergreen Corporation distributes land with a fair market value of $200,000 to its sole shareholder. Evergreen's tax basis in the land is $50,000. Evergreen will report a gain of $150,000 on the distribution regardless of whether its E&P is positive or negative.

Question 5

Evergreen Corporation distributes land with a fair market value of $200,000 to its sole shareholder. Evergreen's tax basis in the land is $50,000. Assuming sufficient E&P, the amount of dividend reported by the shareholder is $200,000.

Question 6

A distribution from a corporation to a shareholder will only be treated as a dividend for tax purposes if the distribution is paid out of current or accumulated E&P.

Question 7

Green Corporation has a deficitin current E&P of ($100,000) and positive accumulated E&P of $250,000. A $50,000 distribution from Green to its sole shareholder at year-end will be treated as a dividend.

Question 8

Big-gain Corporation distributes land with a fair market value of $220,000 to its sole shareholder. Big-gain's tax basis in the land is $115,000. Big-gain will not be taxed on a gain on the distribution if it has a deficit of ($250,000) in E&P.

Question 9

The recipient of a tax-free stock distribution will have a zero tax basis in the stock received in the distribution.

Question 10

The term "E&P" iswell defined in the Internal Revenue Code.

Question 11

A corporation's "E&P" account is equal to the company's "retained earnings" account on itsfinancial balance sheet.

Question 12

This year the shareholders in Lucky Corporation can choose between receiving an additional 100 shares of stock or cash of $100. Lucky's shareholders will be taxed on the distribution if Lucky has sufficient E&P.

Question 13

The recipient of a taxable stock distribution will have a tax basis in the stock equal to the fair market value of the stock received.

Question 14

Stock distributions are always tax-free to the recipient shareholder.

Question 15

Cedar Corporation incurs a net capital loss of $20,000 in 20X3 that is carried forward to 20X4. However, Cedar will deduct the net capital loss in the computation of current E&P for 20X3.

Question 16

Evergreen Corporation distributes land with a fair market value of $50,000 to its sole shareholder. Evergreen's tax basis in the land is $200,000. Evergreen will deduct a tax loss of $150,000 on the distribution regardless of whether its E&P is positive or negative.

Question 17

Green Corporation has current E&P of $100,000 and a deficit in accumulated E&P of ($200,000). A $50,000 distribution from Green to its sole shareholderat year-end will not be treated as a dividend because total E&P is a deficit ($100,000).

Question 18

A stock redemption is always treated as a sale or exchange for tax purposes.

Question 19

Siblings are considered "family" under the stock attribution rules that apply to stock redemptions.

Question 20

Only taxable income and deductible expenses are included in the computation of current E&P.

Question 21

A distribution in partial liquidation of a corporation is always treated as a sale or exchange by an individual shareholder.

Question 22

Grand River Corporation reported taxable income of $700,000 in 20X3 and paid federal income taxes of $238,000. Not included in the computation was a disallowed meals and entertainment expense of $2,400, tax-exempt income of $1,400, and deferred gain on a current-year transaction treated as an installment sale of $27,000. The corporation's current E&P for 20X3 would be:

A) $488,000.
B) $725,600.
C) $700,000.
D) $463,400.

Question 23

Which of the following statements best describes current E&P?

A) Current E&P is another name for a corporation's retained earnings on its balance sheet.
B) Current E&P is a precisely defined tax term in the Internal Revenue Code and represents a corporation's economic income.
C) Current E&P is an ill-defined tax concept in the Internal Revenue Code and represents a corporation's current-year economic income.
D) Current E&P is an ill-defined tax concept.

Question 24

Oakland Corporation reported a net operating loss of $500,000 in 20X3 and elected to carry the loss forward to 20X4. Not included in the computation was a disallowed meals and entertainment expense of $20,000, tax-exempt income of $10,000, and deferred gain on a current-year transaction treated as an installment sale of $250,000. The corporation's current E&P for 20X3 would be:

A) ($500,000).
B) ($720,000).
C) ($510,000).
D) ($260,000).

Question 25

Madison Corporation reported taxable income of $400,000 in 20X3 and accrued federal income taxes of $136,000. Included in the computation of taxable income was regular depreciation of $200,000 (E&P depreciation is $60,000) and a net capital loss carryover of $20,000 from 20X2 utilized in 20X3. The corporation's current E&P for 20X3 would be:

A) $424,000.
B) $404,000.
C) $380,000.
D) $344,000.

Question 26

A calendar-year corporation has deficit in current E&P of ($500) and positive accumulated E&P of $1,000. The corporation makes a $600 distribution to its sole shareholder. Which of the following statements is true?

A) $500 of the distribution will be a dividend because total E&P is $500.
B) $0 of the distribution will be a dividend because current E&P is a deficit.
C) $600 of the distribution will be a dividend because accumulated E&P is $1,000.
D) Up to $600 of the distribution could be a dividend depending on net E&P (current plus accumulated E&P) on the date of the distribution.

Question 27

Which of the following forms of earnings distributions would not be subject to double taxation at the corporate and shareholder level?

A) Dividend
B) Stock redemption
C) Partial liquidation
D) Compensation paid to a shareholder/employee of the corporation.

Question 28

Abbot Corporation reported a net operating loss of $400,000 in 20X3, which the corporation elected to carry forward to 20X4. Included in the computation of the taxable loss was regular depreciation of $100,000 (E&P depreciation is $40,000), first-year expensing under §179 of $50,000, and a dividends received deduction of $10,000. The corporation's current E&P for 20X3 would be:

A) ($330,000).
B) ($290,000).
C) ($400,000).
D) ($490,000).

Question 29

Diego owns 30 percent of Azul Corporation. Azul Corporation owns 50 percent of Verde Corporation. Under the attribution rules applying to stock redemptions, Diego is treated as owning 15 percent of Verde Corporation.

Question 30

The "family attribution" rules are automatically waived in a complete redemption of a shareholder's stock.

Question 31

Au Sable Corporation reported taxable income of $800,000 in 20X3 and paid federal income taxes of $272,000. Not included in the computation was a disallowed penalty of $25,000, life insurance proceeds of $100,000, and a federal income tax refund from 20X2 of $50,000. Au Sable is an accrual-basis taxpayer. The corporation's current E&P for 20X3 would be:

A) $875,000.
B) $653,000.
C) $603,000.
D) $553,000.

Question 32

Which of the following statements best describes the role of current and accumulated E&P in determining if a distribution is a dividend?

A) A distribution will only be a dividend if net E&P (current plus accumulated) is positive at the time of the distribution.
B) A distribution can never be a dividend if current E&P is negative.
C) At a minimum, some portion of the distribution will be a dividend if current E&P for the year is positive, even if accumulated E&P is negative.
D) A distribution will never be a dividend if current E&P for the year is negative, even if accumulated E&P is positive.

Question 33

Greenwich Corporation reported a net operating loss of $800,000 in 20X3, which the corporation elected to carry forward to 20X4. The computation of the loss did not include a disallowed fine of $50,000, life insurance proceeds of $500,000, and a current-year charitable contribution of $10,000 that will be carried forward to 20X4. The corporation's current E&P for 20X3 would be:

A) ($250,000).
B) ($260,000).
C) ($300,000).
D) ($360,000).

Question 34

Battle Corporation redeems 20 percent of its stock for $100,000 in a stock redemption that is treated as an exchange by the shareholders. Battle's E&P at the date of the redemption is $200,000. Battle must reduce its E&P by $100,000 because of the redemption.

Question 35

Grand River Corporation reported taxable income of $500,000 in 20X3 and paid federal income taxes of $170,000. Not included in the computation was a disallowed meals and entertainment expense of $2,000, tax-exempt income of $1,000, and deferred gain on a current-year transaction treated as an installment sale of $25,000. The corporation's current E&P for 20X3 would be:

A) $524,000.
B) $500,000.
C) $354,000.
D) $331,000.

Question 36

A calendar-year corporation has positive current E&P of $500 and a deficit in accumulated E&P of ($1,200). The corporation makes a $400 distribution to its sole shareholder. Which of the following statements is true?

A) The distribution will not be a dividend because total E&P is a deficit.
B) The distribution may be a dividend, depending on whethernet E&P (current plus accumulated E&P) at the date of the distribution is positive.
C) The distribution will be a dividend because current E&P is positive and exceeds the distribution.
D) A distribution from a corporation to a shareholder is always a dividend, regardless of the balance in E&P.

Question 37

Which of these items is not an adjustment to taxable income or net loss to compute current E&P?

A) Dividends received deduction.
B) Tax-exempt income.
C) Net capital loss carryforward utilized in the current year from the prior-year tax return.
D) Refund of prior-year taxes for an accrual-method taxpayer.

Question 38

Abbot Corporation reported a net operating loss of $500,000 in 20X3, which the corporation elected to carry forward to 20X4. Included in the computation of the taxable loss was regular depreciation of $200,000 (E&P depreciation is $35,000), first-year expensing under §179 of $60,000, and a dividends received deduction of $11,000. The corporation's current E&P for 20X3 would be:

A) ($324,000).
B) ($276,000).
C) ($500,000).
D) ($595,000).

Question 39

Packard Corporation reported taxable income of $1,000,000 in 20X3 and paid federal income taxes of $340,000. Included in the taxable income computation was a dividends received deduction of $5,000, a net capital loss carryover from 20X2 of $10,000 utilized in 20X3, and gain of $50,000 recognized on the collection of cash from an installment sale that took place in 20X1. The corporation's current E&P for 20X3 would be:

A) $1,015,000.
B) $965,000.
C) $675,000.
D) $625,000.

Question 40

Which of the following statements best describes the priority of the tax treatment of a distribution from a corporation to a shareholder?

A) The distribution is a dividend to the extent of the corporation's E&P, then a return of capital, and finally gain from sale of stock.
B) The distribution is a return of capital, then a dividend to the extent of the corporation's E&P, and finally gain from sale of stock.
C) The distribution is a return of capital, then gain from sale of stock, and finally a dividend to the extent of the corporation's E&P.
D) The shareholder can elect to treat the distribution as either a dividend to the extent of the corporation's E&P or a return of capital, followed by gain from sale of stock.

Question 41

Which of the following statements is not considered a timing difference due to separate accounting methods for taxable income and E&P?

A) Dividends received deduction
B) Installment gain recognized in current year related to a sale in a prior year
C) Gain on sale of depreciable assets with higher E&P basis
D) Section 179 expense

Question 42

Wildcat Corporation reportsa deficit in current E&P of ($200,000) in 20X3 and accumulated E&P at the beginning of the year of $100,000. Wildcat distributed $300,000 to its sole shareholder on December 31, 20X3. How much of the distribution is treated as a dividend in 20X3?

A) $0
B) $100,000
C) $200,000
D) $300,000

Question 43

Cavalier Corporation had current and accumulated E&P of $500,000 at December 31 20X3. On December 31, the company made a distribution of land to its sole shareholder, Tom Jefferson. The land's fair market value was $200,000 and its tax and E&P basis to Cavalier was $50,000. The tax consequences of the distribution to Cavalier in 20X3 would be:

A) No gain recognized and a reduction in E&P of $200,000.
B) $150,000 gain recognized and a reduction in E&P of $200,000.
C) $150,000 gain recognized and a reduction in E&P of $50,000.
D) No gain recognized and a reduction in E&P of $50,000.

Question 44

Inca Company reportsa deficit in current E&P of ($100,000) in 20X3 and accumulated E&P at the beginning of the year of $200,000. Inca distributed $300,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?

A) $0
B) $100,000
C) $200,000
D) $300,000

Question 45

Which of the following are subtractions from taxable income in computing current E&P?

A) Federal income taxes paid
B) Current charitable contributions in excess of 10 percent limitation
C) Current-year net capital loss
D) All of the choices are subtractions from taxable income in computing current E&P.

Question 46

Longhorn Company reports current E&P of $115,000 in 20X3 and a deficit of ($230,000) in accumulated E&P at the beginning of the year. Longhorn distributed $345,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in his stock in Longhorn is $115,000. How is the distribution treated by the shareholder in 20X3?

A) $345,000 dividend
B) $115,000 dividend, $115,000 tax-free return of basis, and $115,000 capital gain
C) $115,000 dividend and $230,000 tax-free return of basis
D) $0 dividend, $115,000 tax-free return of basis, and $230,000 capital gain

Question 47

Husker Corporation reportsa deficit in current E&P of ($200,000) in 20X3 and accumulated E&P at the beginning of the year of $300,000. Husker distributed $200,000 to its sole shareholder on December 31, 20X3. The shareholder's tax basis in her stock in Husker is $50,000. How is the distribution treated by the shareholder in 20X3?

A) $200,000 dividend
B) $100,000 dividend, $50,000 tax-free return of basis, and $50,000 capital gain
C) $100,000 dividend and $100,000 tax-free return of basis
D) $0 dividend, $50,000 tax-free return of basis, and $150,000 capital gain

Question 48

Inca Company reports a deficit in current E&P of ($165,000) in 20X3 and accumulated E&P at the beginning of the year of $330,000. Inca distributed $430,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?

A) $0
B) $165,000
C) $330,000
D) $430,000

Question 49

This year Truckit reported taxable income of $160,000 and received $20,000 of municipal interest. Truckit paid $55,000 in entertainment expenses and $15,000 in fines and penalties. Truckit had $50,000 of accumulated E&P at the beginning of the year. What is Truckit's current E&P?

A) $180,000
B) $142,200
C) $110,000
D) $76,400

Question 50

Aztec Company reports current E&P of $200,000 in 20X3 anda deficit of ($100,000) in accumulated E&P at the beginning of the year. Aztec distributed $300,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?

A) $300,000
B) $200,000
C) $100,000
D) $0

Question 51

Catamount Company had current and accumulated E&P of $500,000 at December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Caroline West. The land's fair market value was $200,000 and its tax and E&P basis to Catamount was $250,000. The tax consequences of the distribution to Catamount in 20X3 would be:

A) No loss recognized and a reduction in E&P of $250,000.
B) $50,000 loss recognized and a reduction in E&P of $250,000.
C) $50,000 loss recognized and a reduction in E&P of $150,000.
D) No loss recognized and a reduction in E&P of $200,000.

Question 52

Bruin Company reports current E&P of $200,000 in 20X3 and accumulated E&P at the beginning of the year of $100,000. Bruin distributed $400,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?

A) $400,000
B) $300,000
C) $200,000
D) $100,000

Question 53

Longhorn Company reports current E&P of $100,000 in 20X3 anda deficit of ($200,000) in accumulated E&P at the beginning of the year. Longhorn distributed $300,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in his stock in Longhorn is $100,000. How is the distribution treated by the shareholder in 20X3?

A) $300,000 dividend
B) $100,000 dividend, $100,000 tax-free return of basis, and $100,000 capital gain
C) $100,000 dividend and $200,000 tax-free return of basis
D) $0 dividend, $100,000 tax-free return of basis, and $200,000 capital gain

Question 54

Tar Heel Corporation had current and accumulated E&P of $500,000 at December 31 20X3. On December 31, the company made a distribution of land to its sole shareholder, William Roy. The land's fair market value was $100,000 and its tax and E&P basis to Tar Heel was $25,000. William assumed a mortgage attached to the land of $10,000. The tax consequences of the distribution to William in 20X3 would be:

A) $100,000 dividend and a tax basis in the land of $100,000.
B) $100,000 dividend and a tax basis in the land of $90,000.
C) Dividend of $90,000 and a tax basis in the land of $100,000.
D) Dividend of $90,000 and a tax basis in the land of $90,000.

Question 55

Beaver Company reports current E&P of $100,000 in 20X3 and accumulated E&P at the beginning of the year of $200,000. Beaver distributed $400,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in her stock in Beaver is $200,000. How is the distribution treated by the shareholder in 20X3?

A) $400,000 dividend
B) $100,000 dividend, $200,000 tax-free return of basis, and $100,000 capital gain
C) $200,000 dividend and $200,000 tax-free return of basis
D) $300,000 dividend and $100,000 tax-free return of basis

Question 56

Montclair Corporation had current and accumulated E&P of $500,000 at December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Molly Pitcher. The land's fair market value was $200,000 and its tax and E&P basis to Montclair was $50,000. Molly assumed a liability of $25,000 attached to the land. The tax consequences of the distribution to Montclair in 20X3 would be:

A) No gain recognized and a reduction in E&P of $200,000.
B) $150,000 gain recognized and a reduction in E&P of $200,000.
C) $150,000 gain recognized and a reduction in E&P of $175,000.
D) No gain recognized and a reduction in E&P of $175,000.

Question 57

Paladin Corporation had current and accumulated E&P of $500,000 at December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Maria Mendez. The land's fair market value was $200,000 and its tax and E&P basis to Paladin was $250,000. Maria assumed a liability of $25,000 attached to the land. The tax consequences of the distribution to Paladin in 20X3 would be:

A) No loss recognized and a reduction in E&P of $200,000.
B) $50,000 loss recognized and a reduction in E&P of $200,000.
C) $50,000 loss recognized and a reduction in E&P of $225,000.
D) No loss recognized and a reduction in E&P of $225,000.

Question 58

Catamount Company had current and accumulated E&P of $505,000 at December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Caroline West. The land's fair market value was $205,000 and its tax and E&P basis to Catamount was $252,500. The tax consequences of the distribution to Catamount in 20X3 would be:

A) No loss recognized and a reduction in E&P of $252,500.
B) $47,500 loss recognized and a reduction in E&P of $252,500.
C) $47,500 loss recognized and a reduction in E&P of $157,500.
D) No loss recognized and a reduction in E&P of $205,000.

Question 59

Tar Heel Corporation had current and accumulated E&P of $570,000 at December 31 20X3. On December 31, the company made a distribution of land to its sole shareholder, William Roy. The land's fair market value was $170,000 and its tax and E&P basis to Tar Heel was $32,000. William assumed a mortgage attached to the land of $13,500. The tax consequences of the distribution to William in 20X3 would be:

A) $170,000 dividend and a tax basis in the land of $170,000.
B) $170,000 dividend and a tax basis in the land of $156,500.
C) Dividend of $156,500 and a tax basis in the land of $170,000.
D) Dividend of $156,500 and a tax basis in the land of $156,500.

Question 60

Bruin Company reports current E&P of $250,000 in 20X3 and accumulated E&P at the beginning of the year of $125,000. Bruin distributed $450,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?

A) $450,000
B) $375,000
C) $250,000
D) $125,000

Question 61

Sam owns 55 percent of the stock of Club Corporation. Unrelated individuals own the remaining 45 percent. For a stock redemption of Sam's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Club stock must Sam own after the redemption?

A) Any percentage less than 55 percent
B) Any percentage less than 50 percent
C) Any percentage less than 44 percent
D) All stock redemptions involving individuals are treated as exchanges

Question 62

Viking Corporation is owned equally by Sven and his wife, Olga, each of whom holds 125 shares in the company. Viking redeemed 80 shares of Sven's stock for $1,700 per share on December 31, 20X3. Viking has total E&P of $470,000. What are the tax consequences to Viking because of the stock redemption?

A) No reduction in E&P because of the exchange.
B) A reduction of $136,000 in E&P because of the exchange.
C) A reduction of $150,400 in E&P because of the exchange.
D) A reduction of $300,800 in E&P because of the exchange.

Question 63

Comet Company is owned equally by Pat and his sister Pam, each of whom holds 105 shares in the company. Pam wants to reduce her ownership in the company, and it was decided that the company will redeem 54 of her shares for $1,080 per share on December 31, 20X3. Pam's income tax basis in each share is $400. Comet has total E&P of $300,000. What are the tax consequences to Pam because of the stock redemption?

A) $36,720 capital gain and a tax basis in each of her remaining shares of $400.
B) $36,720 capital gain and a tax basis in each of her remaining shares of $105.
C) $58,320 dividend and a tax basis in each of her remaining shares of $105.
D) $58,320 dividend and a tax basis in each of her remaining shares of $54.

Question 64

Comet Company is owned equally by Pat and his sister Pam, each of whom holds 100 shares in the company. Comet redeems 50 of Pam's shares on December 31, 20X3, for $1,000 per share in a transaction that Pam treats as an exchange for tax purposes. Comet has total E&P of $160,000 on December 31, 20X3. What are the tax consequences to Comet because of the stock redemption?

A) No reduction in E&P because of the exchange.
B) A reduction of $50,000 in E&P because of the exchange.
C) A reduction of $40,000 in E&P because of the exchange.
D) A reduction of $80,000 in E&P because of the exchange.

Question 65

Corona Company is owned equally by Maria, her sister Carlita, her mother, Gabriella, and her grandmother Olivia, each of whom holds 100 shares in the company. Under the family attribution rules, how many shares of Corona stock is Maria deemed to own?

A) 100
B) 200
C) 300
D) 400

Question 66

Sara owns 60 percent of the stock of Lea Corporation. Unrelated individuals own the remaining 40 percent. For a stock redemption of Sara's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Lea stock must Sara own after the redemption?

A) Any percentage less than 60 percent
B) Any percentage less than 50 percent
C) Any percentage less than 48 percent
D) All stock redemptions involving individuals are treated as exchanges

Question 67

Which of the following stock distributions would be tax-free to the shareholder?

A) A 2-for-1 stock split to all holders of common stock.
B) A stock distribution where the shareholder could choose between cash and stock.
C) A stock distribution to all holders of preferred stock.
D) A 2-for-1 stock split to all holders of common stock and a stock distribution to all holders of preferred stock are tax-free to the shareholder.

Question 68

Beltway Company is owned equally by George, his brother Thomas, and a partnership owned 50 percent by George and his father, Abe. Each of the three shareholders holds 120 shares in the company. Under the §318 stock attribution rules, how many shares of Beltway stock is George deemed to own?

A) 120
B) 180
C) 240
D) 360

Question 69

El Toro Corporation declared a common stock distribution to all shareholders of record on June 30, 20X3. Shareholders will receive one share of El Toro stock for each two shares of stock they already own. Raoul owns 350 shares of El Toro stock, with a tax basis of $81 per share. The fair market value of the El Toro stock was $121 per share on June 30, 20X3. What are the tax consequences of the stock distribution to Raoul?

A) $0 dividend income and a tax basis in the new stock of $121 per share.
B) $0 dividend income and a tax basis in the new stock of $81 per share.
C) $0 dividend income and a tax basis in the new stock of $54 per share.
D) $21,175 dividend and a tax basis in the new stock of $121 per share.

Question 70

Comet Company is owned equally by Pat and his sister Pam, each of whom holds 100 shares in the company. Comet redeems 50 of Pam's shares on December 31, 20X3, for $1,000 per share in a transaction that Pam treats as an exchange for tax purposes. Comet has total E&P of $250,000 on December 31, 20X3. What are the tax consequences to Comet because of the stock redemption?

A) No reduction in E&P because of the exchange.
B) A reduction of $50,000 in E&P because of the exchange.
C) A reduction of $62,500 in E&P because of the exchange.
D) A reduction of $125,000 in E&P because of the exchange.

Question 71

Which of the following statements is true?

A) All stock redemptions are treated as exchanges for tax purposes.
B) A stock redemption not treated as an exchange will automatically be treated as a taxable dividend.
C) All stock redemptions are treated as dividends if received by an individual.
D) A stock redemption is treated as an exchange only if it meets one of three stock ownership tests described in the Internal Revenue Code.

Question 72

Comet Company is owned equally by Pat and his sister Pam, each of whom holds 100 shares in the company. Pam wants to reduce her ownership in the company, and it was decided that the company will redeem 50 of her shares for $1,000 per share on December 31, 20X3. Pam's income tax basis in each share is $500. Comet has total E&P of $250,000. What are the tax consequences to Pam because of the stock redemption?

A) $25,000 capital gain and a tax basis in each of her remaining shares of $500.
B) $25,000 capital gain and a tax basis in each of her remaining shares of $100.
C) $50,000 dividend and a tax basis in each of her remaining shares of $100.
D) $50,000 dividend and a tax basis in each of her remaining shares of $50.

Question 73

Beltway Company is owned equally by George, his brother Thomas, and a partnership owned 50 percent by George and his father, Abe. Each of the three shareholders holds 100 shares in the company. Under the §318 stock attribution rules, how many shares of Beltway stock is George deemed to own?

A) 100
B) 150
C) 200
D) 300

Question 74

Panda Company is owned equally by Min, her husband, Bin, her sister Xiao, and her grandson, Han, each of whom holds 100 shares in the company. Under the family attribution rules, how many shares of Panda stock is Min deemed to own?

A) 100
B) 200
C) 300
D) 400

Question 75

Viking Corporation is owned equally by Sven and his wife, Olga, each of whom holds 100 shares in the company. Viking redeemed 75 shares of Sven's stock for $2,000 per share on December 31, 20X3. Viking has total E&P of $500,000. What are the tax consequences to Viking because of the stock redemption?

A) No reduction in E&P because of the exchange.
B) A reduction of $150,000 in E&P because of the exchange.
C) A reduction of $187,500 in E&P because of the exchange.
D) A reduction of $375,000 in E&P because of the exchange.

Question 76

El Toro Corporation declared a common stock distribution to all shareholders of record on June 30, 20X3. Shareholders will receive one share of El Toro stock for each two shares of stock they already own. Raoul owns 300 shares of El Toro stock, with a tax basis of $60 per share. The fair market value of the El Toro stock was $100 per share on June 30, 20X3. What are the tax consequences of the stock distribution to Raoul?

A) $0 dividend income and a tax basis in the new stock of $100 per share.
B) $0 dividend income and a tax basis in the new stock of $60 per share.
C) $0 dividend income and a tax basis in the new stock of $40 per share.
D) $15,000 dividend and a tax basis in the new stock of $100 per share.

Question 77

Which of the following individuals is not considered "family" for purposes of applying the stock attribution rules to a stock redemption?

A) Parents
B) Grandchildren
C) Grandparents
D) Spouse

Question 78

Viking Corporation is owned equally by Sven and his wife, Olga, each of whom holds 100 shares in the company. Viking redeemed 75 shares of Sven's stock in the company on December 31, 20X3. Viking paid Sven $2,000 per share. His income tax basis in each share is $1,000. Viking has total E&P of $500,000. What are the tax consequences to Sven because of the stock redemption?

A) $75,000 capital gain and a tax basis in each of his remaining shares of $1,000.
B) $75,000 capital gain and a tax basis in each of his remaining shares of $2,000.
C) $150,000 dividend and a tax basis in each of his remaining shares of $1,000.
D) $150,000 dividend and a tax basis in each of his remaining shares of $4,000.

Question 79

Wonder Corporation declared a common stock distribution to all shareholders of record on September 30, 20X3. Shareholders will receive three shares of Wonder stock for each five shares of stock they already own. Diana owns 300 shares of Wonder stock with a tax basis of $90 per share (a total basis of $27,000). The fair market value of the Wonder stock was $180 per share on September 30, 20X3. What are the tax consequences of the stock distribution to Diana?

A) $0 dividend income and a tax basis in the new stock of $180 per share.
B) $0 dividend income and a tax basis in the new stock of $67.50 per share.
C) $0 dividend income and a tax basis in the new stock of $56.25 per share.
D) $10,800 dividend and a tax basis in the new stock of $180 per share.

Question 80

Sam owns 70 percent of the stock of Club Corporation. Unrelated individuals own the remaining 30 percent. For a stock redemption of Sam's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Club stock must Sam own after the redemption?

A) Any percentage less than 70 percent
B) Any percentage less than 56 percent
C) Any percentage less than 50 percent
D) All stock redemptions involving individuals are treated as exchanges