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Exam 14: Corporate Nonliquidating and Liquidating Distributions

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Question 41

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

A) True
B) False

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Question 42

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Au Sable Corporation reported taxable income of $800,000 in year 2 and paid federal income taxes of $168,000.Not included in the computation was a disallowed penalty of $25,000, and life insurance proceeds of $100,000.Included in the computation of taxable income is a deduction for the bargain element of exercised nonqualified stock options of $50,000.The corporation's current earnings and profits for year 2 would be:

A) $875,000.
B) $757,000.
C) $707,000.
D) $657,000.

E) A) and D)
F) A) and C)

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Question 43

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Which statement best describes the concept of the double taxation of corporate income?

Cedar Corporation incurs a net capital loss of $20,000 in year 1 that cannot be deducted on its income tax return but must be carried forward to year 2.Cedar will deduct the net capital loss in the computation of current earnings and profits for year 1.

Cavalier Corporation had current and accumulated E&P of $500,000 at December 31, year 1.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 year 1 would be (assume a 0 percent marginal tax rate for Cavalier) :

Montclair Corporation had current and accumulated E&P of $500,000 at December 31, year 1.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 year 1 would be (assume a 0 percent marginal tax rate for Montclair) :

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?

Robin transferred her 60 percent interest to Cardinal Company as part of a complete liquidation of the company.In the exchange she received land with a fair market value of $800,000.Robin's basis in the Cardinal stock was $900,000.The land had a basis to Cardinal Company of $1,000,000.What amount of loss does Cardinal recognize in the exchange and what is Robin's basis in the land she receives? The distribution was non-pro rata to Robin, a related person.

St.Clair Corporation reports positive current E&P of $500,000 in year 1 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, year 1.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?

Oakland Corporation reported a net operating loss of $500,000 in year 1.Not included in the year 1 taxable income computation was a disallowed entertainment expense of $20,000, tax-exempt income of $10,000, and deferred gain on an installment sale of $250,000.The corporation's current earnings and profits for year 1 would be:

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?

Comet Corporation is owned equally by Patrick and his sister Pam, each of whom hold 100 shares in the company.Comet redeems 50 of Pam's shares on December 31, year 1, 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, year 1.What are the tax consequences to Comet as a result of the stock redemption?

Stock distributions are always nontaxable to the recipient.

Longhorn Company reports current E&P of $100,000 in year 1 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, year 1.The shareholder's tax basis in his Longhorn stock is $100,000.How is the distribution treated by the shareholder in year 1?

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 Gary recognize in the complete liquidation?

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 will reduce its earnings and profits by $100,000 as a result of the redemption.

Crystal Inc.is owned equally by John and his wife, Arlene, each of whom own 500 shares in the company.Arlene wants to reduce her ownership in the company, and it was decided that the company will redeem 200 of her shares for $5,000 per share on December 31, year 1.Arlene's income tax basis in each share is $1,000.Crystal has current E&P of $1,000,000 and accumulated E&P of $3,000,000.What is the amount and character (capital gain or dividend)recognized by Arlene as a result of the stock redemption, assuming only the "substantially disproportionate with respect to the shareholder" test is applied?

Ozark Corporation reported taxable income of $500,000 from operations for year 1.During the year, the company made a distribution of land to its sole shareholder, Marcus Twain.The land's fair market value was $100,000 and its tax and E&P basis to Ozark was $125,000.Marcus assumed a mortgage attached to the land of $25,000.The company had accumulated E&P of $850,000 at the beginning of the year.Compute Ozark's total taxable income and federal income tax paid as a result of the distribution.Using your solution, compute Ozark's accumulated E&P at January 1, year 2.

Paladin Corporation had current and accumulated E&P of $500,000 at December 31, year 1.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 year 1 would be:

Husker Corporation reports current E&P of negative $200,000 in year 1 and accumulated E&P at the beginning of the year of $300,000.Husker distributed $200,000 to its sole shareholder on December 31, year 1.The shareholder's tax basis in her stock in Husker is $50,000.How is the distribution treated by the shareholder in year 1?