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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 61

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

A) Corporations have an incentive to retain earnings and structure distributions to avoid dividend treatment.
B) Corporations have an incentive to invest in noncorporate rather than corporate businesses.
C) The cost of capital for corporate investments is increased.
D) Corporations have an incentive to finance operations with debt rather than equity.
E) All of the above are consequences of the double tax on dividends.

F) A) and C)
G) A) and E)

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Question 62

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

A) True
B) False

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Question 63

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Albatross Corporation acquired land for investment purposes in 2000 at a cost of $100,000. Albatross sold the land to Monty on December 30, 2014, and did not elect out of the installment method of accounting. The selling price of the property was $400,000. Monty made a cash down payment of $50,000 on the date of sale and executed a $350,000 note, payable in seven annual installments of $50,000 each plus interest at the rate of 6% per annum. The first installment of $50,000 was due in 2015 which Monty paid, plus interest of $21,000. Discuss the effect of this sale on Albatross's taxable income and its E & P account in 2014 and 2015.

Property distributed by a corporation as a dividend is subject to a liability in excess of its basis. For purposes of determining gain on the distribution, the basis of the property is treated as being not less than the amount of liability.

To determine current E & P, taxable income must be increased for any domestic production activities deduction.

A corporation borrows money to purchase State of Texas bonds. The interest on the loan has no impact on either taxable income or current E & P.

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to determine current E & P. -Intangible drilling costs deducted currently.

Which of the following statements is incorrect with respect to determining current E & P?

Dividends taxed as ordinary income are considered investment income for purposes of the investment interest expense limitation.

A redemption will qualify as a not essentially equivalent redemption only if the shareholder's interest in the redeeming corporation has been meaningfully reduced.

The gross estate of John, decedent, includes stock in Crimson Corporation and Jade Corporation valued at $1.3 million and $2 million, respectively. John's adjusted gross estate is $9 million. He owned 23% of the Crimson stock and 31% of the Jade stock. Immediate members of John's family own the remaining shares of both Crimson and Jade. Those individuals are also the sole beneficiaries of John's estate. Death taxes and funeral and administration expenses for John's estate are $1.3 million. John had a basis of $475,000 in the Crimson stock and $510,000 in the Jade stock. Crimson Corporation (E & P of $3 million) distributed land worth $1.3 million (basis of $800,000) to John's estate in redemption of all of the Crimson stock. Which of the following is a correct statement regarding the tax consequences of this redemption?

In applying the § 318 stock attribution rules to a stock redemption, a shareholder is treated as owning the stock of her spouse, children, grandchildren, parents, and siblings.

A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation's E & P.

When computing current E & P, taxable income must be adjusted for the deferred gain in a § 1031 like­kind exchange.

Ivory Corporation (E & P of $1 million) has 2,000 shares of common stock outstanding owned by unrelated parties as follows: Veronica, 1,000 shares, and Tommie, 1,000 shares. Veronica and Tommie each paid $150 per share for the Ivory stock 12 years ago. In May of the current year, Ivory distributes land held as an investment (basis of $180,000, fair market value of $390,000) to Veronica in redemption of 350 of her shares. a. What are the tax results to Veronica on the redemption of her Ivory stock? b. What are the tax results to Ivory Corporation on the distribution of the land?

Ten years ago, Carrie purchased 2,000 shares in Osprey Corporation for $20,000. In the current year, Carrie receives a nontaxable stock dividend of 20 shares of Osprey preferred. Values at the time of the dividend are: $8,000 for the preferred stock and $72,000 for the common. Based on this information, Carrie's basis in the stock is:

Finch Corporation (E & P of $400,000) distributed machinery ($10,000 adjusted basis, $150,000 fair market value) to its sole shareholder, Kathleen. The property is subject to a $50,000 mortgage, which Kathleen assumed. How much dividend income does Kathleen recognize as a result of the distribution and what is her basis in the machinery?

Purple Corporation makes a property distribution to its sole shareholder, Paul. The property distributed is a house (fair market value of $189,000; basis of $154,000) that is subject to a $245,000 mortgage that Paul assumes. Before considering the consequences of the distribution, Purple's current E & P is $35,000 and its accumulated E & P is $140,000. Purple makes no other distributions during the current year. What is Purple's taxable gain on the distribution of the house?

Navy Corporation has E & P of $240,000. It distributes land with a fair market value of $70,000 (adjusted basis of $25,000) to its sole shareholder, Troy. The land is subject to a liability of $55,000 that Troy assumes. Troy has:

Seven years ago, Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 2,000 shares of Blue Corporation in a transaction that qualified under § 351. The assets had a tax basis to her of $400,000 and a fair market value of $700,000 on the date of the transfer. In the current year, Blue Corporation (E & P of $1 million) redeems 600 shares from Eleanor for $260,000 in a transaction that does not qualify for sale or exchange treatment. With respect to the redemption, Eleanor will have a: