Question 1

Greenwich Corporation reported a net operating loss of $800,000 in year 1.Not included in the year 1 taxable income computation were 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 year 2.The corporation's current earnings and profits for year 1 would be:

Accepted Answer

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

Question 2

Abbot Corporation reported a net operating loss of $400,000 in year 1.Included in the year 1 taxable income computation were regular depreciation of $100,000 (E&P depreciation is $40,000), and a dividends received deduction of $15,000.The corporation's current earnings and profits for year 1 would be:

Accepted Answer

A) $(325,000). 
B) $(340,000). 
C) $(400,000). 
D) $(355,000).

Question 3

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

Accepted Answer

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 4

Which of the following statements is true?

Accepted Answer

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 the tests specified in the Internal Revenue Code.

Question 5

Mike and Michelle decided to liquidate their jointly owned corporation, Pennsylvania Corporation.After liquidating its remaining inventory and paying off its remaining liabilities, Pennsylvania had the following tax accounting balance sheet.
 $$\begin{array} { l r r r r } 
&&& \text { Appreciation } \
& \text { Tax Basis } & \text { FMV } & \text {(Depreciation)}\

\text { Cash } & \$ 200,000 & \$ 200,000 & \
\text { Building } & 200,000 & 100,000& 100,000 \
\text { Land } & \underline{100,000 }&\underline{ 150,000 }& \underline{50,000} \
\text { Total}&\underline{ \$ 500,000} &\underline{ \$ 450,000} & \underline{\$ 50,000}\
\end{array}$$
 Under the terms of the agreement, Mike will receive the $200,000 cash in exchange for his 40 percent interest in Pennsylvania.Mike's tax basis in his Pennsylvania stock is $50,000.Michelle will receive the building and land in exchange for her 60 percent interest in Pennsylvania.Her tax basis in the Pennsylvania stock is $100,000.
What amount of gain or loss does Mike recognize in the complete liquidation?

Accepted Answer

The answer of Mike and Michelle decided to liquidate their...

Question 6

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

Accepted Answer

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

Question 7

Gary and Laura decided to liquidate their jointly owned corporation, Amelia Inc.After liquidating its remaining inventory and paying off its remaining liabilities, Amelia had the following tax accounting balance sheet.
 $$\begin{array} { l r r r r } 
& \text { Tax Basis } & \text { FMV } & \text { Appreciation } \
\text { Cash } & \$ 100,000 & \$ 100,000 & \
\text { Building } & 150,000 & 200,000& 50,000 \
\text { Land } & \underline{50,000 }&\underline{ 120,000 }& \underline{70,000} \
\text { Total}&\underline{ \$ 300,000} &\underline{ \$ 420,000} & \underline{\$ 120,000}\
\end{array}$$ Under the terms of the agreement, Gary will receive the $100,000 cash in exchange for his interest in Amelia.Gary's tax basis in his Amelia stock is $30,000.Laura will receive the building and land in exchange for her interest in Amelia.Laura's tax basis in her Amelia stock is $60,000.
What amount of gain or loss does Amelia recognize in the complete liquidation?

Accepted Answer

The answer of Gary and Laura decided to liquidate their...

Question 8

General Inertia Corporation made a distribution of $50,000 to Henry Tiara in partial liquidation of the company on December 31, year 1.Henry owns 500 shares (50 percent)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 percent 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 as a result of the transaction?

Accepted Answer

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 9

The tax basis of property received by a noncorporate shareholder in a complete liquidating will be the property's fair market value.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Green Corporation has negative current earnings and profits of $100,000 and positive accumulated earnings and profits of $200,000.A $50,000 distribution from Green to its sole shareholder at the end of the year will be treated as a dividend because total earnings and profits is a positive $100,000.

Accepted Answer

A) True 
 B)False

Question 12

Only income and deductions included on a corporation's income tax return are included in the computation of current earnings and profits.

Accepted Answer

A) True 
 B)False

Question 13

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 and/or accumulated earnings and profits.

Accepted Answer

A) True 
 B)False

Question 14

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, Tammy must reduce her stock ownership to below 48 percent.

Accepted Answer

A) True 
 B)False

Question 15

Townsend Corporation declared a one-for-one stock distribution to all common stock shareholders of record on December 31, year 1.Townsend reported current E&P of $400,000 and accumulated E&P of $1,000,000.The total fair market value of the stock distributed was $500,000.Regina Williams owned 1,000 shares of Townsend common stock, with a tax basis of $200 per share ($200,000 total).The fair market value of the common stock was $300 per share on December 31, year 1.What is Regina's income tax basis in the new and existing common stock she owns in Townsend, assuming the distribution is nontaxable?

Accepted Answer

The answer of Townsend Corporation declared a one-for-one stock distribution...

Question 16

Half Moon Corporation made a distribution of $300,000 to Arnold Swartz in partial liquidation of the company on December 31, year 1.Arnold owns 100 percent of Half Moon Corporation (1,200 shares).The distribution was in exchange for 50 percent of Arnold's stock in the company (600 shares).At the time of the distribution, the shares had a fair market value of $500 per share.Arnold's income tax basis in the shares was $250 per share.Half Moon had total E&P of $2,000,000 at the time of the distribution.What is the amount and character (capital gain or dividend)of any income or gain recognized by Arnold as a result of the partial liquidation?

Accepted Answer

The answer of Half Moon Corporation made a distribution of...

Question 17

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?

Accepted Answer

A) The distribution will not be a dividend because total earnings and profits is 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 is positive and exceeds the distribution. 
D) A distribution from a corporation to a shareholder is always a dividend, regardless of the balance in earnings and profits.

Question 18

Goose Company is owned equally by Val and her sister Eugenia, each of whom own 500 shares in the company.Val wants to reduce her ownership in the company and have the transaction treated as an exchange for tax purposes.Determine the minimum amount of stock that Goose must redeem from Val for her to treat the redemption as being "substantially disproportionate with respect to the shareholder" and receive exchange treatment.

Accepted Answer

The answer of Goose Company is owned equally by Val...

Question 19

Walloon Inc.reported taxable income of $1,000,000 in year 2 and paid federal income taxes of $210,000.The company reported a capital gain from sale of investments of $150,000, which was partially offset by a $40,000 net capital loss carryover from year 1, resulting in a net capital gain of $110,000 included in taxable income.Compute the company's current E&P for year 2.

Accepted Answer

The answer of Walloon Inc.reported taxable income of $1,000,000 in...

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 14: Corporate Nonliquidating and Liquidating Distributions

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

Which of the following statements is true?

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

The tax basis of property received by a noncorporate shareholder in a complete liquidating will be the property's fair market value.

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

Green Corporation has negative current earnings and profits of $100,000 and positive accumulated earnings and profits of $200,000.A $50,000 distribution from Green to its sole shareholder at the end of the year will be treated as a dividend because total earnings and profits is a positive $100,000.

Only income and deductions included on a corporation's income tax return are included in the computation of current earnings and profits.

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 and/or accumulated earnings and profits.

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, Tammy must reduce her stock ownership to below 48 percent.

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