Deck 7: Corporate Taxation: Nonliquidating Distributions

Question 1

Green Corporation has current earnings and profits of $100,000 and negative accumulated earnings and profits of ($200,000). A $50,000 distribution from Green to its sole shareholder will not be treated as a dividend because total earnings and profits is a negative $100,000.

Answer 1

False
Explanation: The distribution will be a dividend because Green has positive current E&p.

Question 2

The "double taxation" of corporate income refers to the taxation of corporate income at both the entity-level and the shareholder-level.

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 earnings and profits for 20X3.

Answer 3

True
Explanation: E&p is an after-tax computation.

Question 4

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

Question 5

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

Question 6

Biggain Corporation distributes land with a fair market value of $220,000 to its sole shareholder. Biggain's tax basis in the land is $115,000. Biggain will not report a gain on the distribution if it has a deficit of over $105,000 in earnings and profits.

Question 7

The term "earnings and profits" is well defined in the Internal Revenue Code.

Question 8

Only taxable income and deductible expenses are included in the computation of current earnings and profits.

Question 9

Tammy owns 60 percent of the stock of Huron Corporation. Unrelated individuals own the remaining 40 percent. For a stock redemption 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.

Question 10

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 11

Green Corporation has negative current earnings and profits of ($100,000) and positive accumulated earnings and profits of $250,000. A $50,000 distribution from Green to its sole shareholder will be treated as a dividend because total earnings and profits is a positive $150,000.

Question 12

A distribution from a corporation to a shareholder will always be treated as a dividend for tax purposes.

Question 13

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 earnings and profits, the amount of dividend reported by the shareholder is $200,000.

Question 14

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 earnings and profits.

Question 15

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

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 report a tax loss of $150,000 on the distribution regardless of whether its earnings and profits are positive or negative.

Question 17

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 18

A corporation's "earnings and profits" account is equal to the company's "retained earnings" account on its balance sheet.

Question 19

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 earnings and profits are positive or negative.

Question 20

Cedar Corporation incurs a net capital loss of $20,000 in 20X3 that cannot be deducted on its income tax return but must be carried forward to 20X4. However, Cedar will deduct the net capital loss in the computation of current earnings and profits for 20X3.

Question 21

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 earnings and profits for 20X3 would be:

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

Question 22

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 23

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 earnings and profits for 20X3 would be:

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

Question 24

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 earnings and profits for 20X3 would be:

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

Question 25

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 earnings and profits, 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 earnings and profits, 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 earnings and profits.
D) The shareholder can elect to treat the distribution as either a dividend to the extent of the corporation's earnings and profits or a return of capital, followed by gain from sale of stock.

Question 26

A calendar-year corporation has negative current E&P of $500 and accumulated positive 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 earnings and profits is $500.
B) $0 of the distribution will be a dividend because current earnings and profits are negative.
C) $600 of the distribution will be a dividend because accumulated earnings and profits is $1,000.
D) Up to $600 of the distribution could be a dividend depending on the balance in accumulated earnings and profits on the date of the distribution.

Question 27

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

A) Current earnings and profits is another name for a corporation's retained earnings on its balance sheet.
B) Current earnings and profits is a precisely defined tax term in the Internal Revenue Code and represents a corporation's economic income.
C) Current earnings and profits is an ill-defined tax concept in the Internal Revenue Code and represents a corporation's economic income.
D) Current earnings and profits is a conceptual tax concept with no definition in the Internal Revenue Code.

Question 28

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 29

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

Question 30

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

Question 31

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 earnings and profits for 20X3 would be:

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

Question 32

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 33

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 earnings and profits for 20X3 would be:

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

Question 34

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

Question 35

Greenwich Corporation reported a net operating loss of $800,000 in 20X3, which the corporation elected to carryforward 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 earnings and profits for 20X3 would be:

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

Question 36

Abbot Corporation reported a net operating loss of $400,000 in 20X3, which the corporation elected to carryforward 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 earnings and profits for 20X3 would be:

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

Question 37

A calendar-year corporation has positive current E&P of $500 and accumulated negative 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 earnings and profits is a negative $700.
B) The distribution may be a dividend, depending on whether total earnings and profits at the date of the distribution is positive.
C) The distribution will be a dividend because current earnings and profits are positive and exceed the distribution.
D) A distribution from a corporation to a shareholder is always a dividend, regardless of the balance in earnings and profits.

Question 38

Which of the following statements best describes the role of current and accumulated earnings and profits in determining if a distribution is a dividend?

A) A distribution will only be a dividend if total earnings and profits (current plus accumulated) is positive at the time of the distribution.
B) A distribution can never be a dividend if current earnings and profits are negative.
C) At a minimum, some portion of the distribution will be a dividend if current earnings and profits for the year are positive, even if accumulated earnings and profits are negative.
D) A distribution will never be a dividend if current earnings and profits for the year are negative, even if accumulated earnings and profits is positive.

Question 39

Which statement best describes the concept of the "double taxation" of corporation income?

A) Corporate income is subject to two levels of taxation: the regular tax and excess profits tax.
B) Corporate income is taxed twice at the corporate level: first when earned and then a second time if appreciated property is distributed to a shareholder.
C) Corporate income is taxed when earned by a C corporation and then a second time at the shareholder level when distributed as a dividend.
D) Corporate income is subject to two levels of taxation: at the federal level and a second time at the state level.

Question 40

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 earnings and profits by $100,000 because of the redemption.

Question 41

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 42

Husker Corporation reports current E&P of negative $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 43

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 44

Aztec Company reports current E&P of $200,000 in 20X3 and accumulated E&P at the beginning of the year of negative $100,000. 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 45

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 46

Longhorn Company reports current E&P of $100,000 in 20X3 and accumulated E&P at the beginning of the year of negative $200,000. 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 47

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 48

El Toro Corporation declared a common stock distribution to all shareholders of record on June 30, 20X3. Shareholders will receive 1 share of El Toro stock for each 2 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 49

Wildcat Corporation reports current E&P of negative $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 50

Inca Company reports current E&P of negative $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 51

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 52

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 53

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 54

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 55

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 56

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 57

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 58

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 59

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 60

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 61

Panda Company is owned equally by Min, her husband Bin, her sister Xiao, and her grandson, Han, each of whom hold 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 62

Erie Corporation reported taxable income of $2,200,000 in 20X3 before any deduction for any payment to its sole shareholder and employee, LaBron Cleveland. Erie paid a bonus of $200,000 to LaBron at year-end. Erie Corporation is subject to a flat-rate tax of 21%. The bonus meets the requirements to be "reasonable" and is therefore deductible by Erie. LaBron is subject to a marginal tax rate of 35% on the bonus. What is the total federal income tax imposed on the corporate income earned by Erie and paid to LaBron as a bonus?

Question 63

Viking Corporation is owned equally by Sven and his wife Olga, each of whom hold 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 64

Corona Company is owned equally by Maria, her sister Carlita, her mother Gabriella, and her grandmother Olivia, each of whom hold 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 65

Lansing Company is owned equally by Jennifer, her husband Dan, and DeWitt Corporation, which is owned 50 percent by Jennifer and her sister Jane. Each of the three shareholders holds 100 shares in the company. Under the §318 stock attribution rules, how many shares of Lansing stock is Jennifer deemed to own?

A) 100.
B) 200.
C) 250.
D) 300.

Question 66

Lansing Company is owned equally by Jennifer, her husband Dan, and DeWitt Corporation, which is owned 50 percent by Jennifer and her sister Jane. Each of the three shareholders holds 100 shares in the company. Under the §318 stock attribution rules, how many shares of Lansing stock is DeWitt Corporation deemed to own?

A) 100.
B) 200.
C) 250.
D) 300.

Question 67

Comet Company is owned equally by Pat and his sister Pam, each of whom hold 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 68

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.

Question 69

Comet Company is owned equally by Pat and his sister Pam, each of whom hold 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 70

Superior Corporation reported taxable income of $1,000,000 in 20X3. Superior paid a dividend of $100,000 to its sole shareholder, Mary Yooper. Superior Corporation is subject to a flat rate tax of 21%. The dividend meets the requirements to be a "qualified dividend" and Mary is subject to a tax rate of 15% on the dividend. What is the total federal income tax imposed on the corporate income earned by Superior including taxes on the amount distributed to Mary as a dividend?

Question 71

Viking Corporation is owned equally by Sven and his wife Olga, each of whom hold 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 72

Elk Company reports negative current E&P of $200,000 and positive accumulated E&P of $300,000. Elk distributed $200,000 to its sole shareholder, Barney Rubble, on December 31, 20X3. Barney's tax basis in his Elk stock is $75,000. What is the tax treatment of the distribution to Barney and what is his tax basis in Elk stock after the distribution?

Question 73

St. Clair Company reports positive current E&P of $500,000 in 20X3 and positive accumulated E&P at the beginning of the year of $400,000. St. Clair Company distributed $600,000 to its sole shareholder, Danielle Brush on December 31, 20X3. Danielle's tax basis in her St. Clair stock is $120,000. How much of the $600,000 distribution is treated as a dividend to Danielle and what is her basis in St. Clair stock after the distribution?

Question 74

Tammy owns 100 shares in Star Struck Corporation. The other 100 shares are owned by her husband Tommy. Which of the following statements is True?

A) A stock redemption that completely terminates Tammy's direct interest in a corporation will be treated as an exchange for tax purposes.
B) A stock redemption that completely terminates Tammy's direct interest in a corporation will be treated as a dividend for tax purposes.
C) A stock redemption that completely terminates Tammy's direct interest in a corporation will be treated as an exchange if Tammy waives the family attribution rules and files a "triple i" agreement with the IRS.
D) A stock redemption that completely terminates Tammy's direct interest in a corporation will be treated as a dividend to the extent that the redemption exceeds Tammy's tax basis in the redeemed shares.

Question 75

Comet Company is owned equally by Pat and his sister Pam, each of whom hold 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 76

Austin Company reports positive current E&P of $200,000 and negative accumulated E&P of $300,000. Austin distributed $250,000 to its sole shareholder, Betsy Bevo, on December 31, 20X3. Betsy' tax basis in her stock is $125,000. How much of the $250,000 distribution is treated as a dividend to Betsy and what is her tax basis in Austin stock after the distribution?

Question 77

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 78

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 79

General Inertia Corporation made a distribution of $50,000 to Henry Tiara in partial liquidation of the company on December 31, 20X3. Henry owns 500 shares (50%) of General Inertia. The distribution was in exchange for 250 shares of Henry's stock in the company. After the partial liquidation, Henry continued to own 50% of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Henry's income tax basis in the shares was $100 per share. General Inertia had total E&P of $800,000 at the time of the distribution. What are the tax consequences to Henry because of the transaction?

A) Henry has dividend income of $50,000 and a tax basis in his remaining shares of $100 per share.
B) Henry has capital gain of $25,000 and a tax basis in his remaining shares of $100 per share.
C) Henry has dividend income of $50,000 and a tax basis in his remaining shares of $200 per share.
D) Henry has capital gain of $25,000 and a tax basis in his remaining shares of $200 per share.

Question 80

General Inertia Corporation made a pro rata distribution of $50,000 to Tiara, Inc. in partial liquidation of the company on December 31, 20X3. Tiara, Inc. owns 500 shares (50%) of General Inertia. The distribution was in exchange for 250 shares of Tiara's stock in the company. After the partial liquidation, Tiara continued to own 50% of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Tiara's income tax basis in the shares was $100 per share. General Inertia had total E&P of $800,000 at the time of the distribution. What amount of dividend or capital gain does Tiara recognize because of the transaction?

A) Tiara does not recognize any dividend income or capital gain.
B) Tiara recognizes capital gain of $50,000.
C) Tiara recognizes dividend income of $50,000.
D) Tiara recognizes capital gain of $25,000.