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Exam 13: Corporate Nonliquidating and Liquidating Distributions

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Question 31

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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%) 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 as a result 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.

E) A) and D)
F) None of the above

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Question 32

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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:

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.

E) A) and D)
F) All of the above

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Question 33

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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?

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

Houghton Company reports negative current E&P of $500,000 and negative accumulated E&P of $800,000.  Houghton distributed $100,000 to its sole shareholder,Blossom Applegate,on December 31,year 1.Blossom's tax basis in her Houghton stock is $50,000.What is the tax treatment of the distribution to Blossom and what is her tax basis in Houghton stock after the distribution?

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.

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?

Orchard,Inc.reported taxable income of $800,000 in year 1 and paid federal income taxes of $168,000.Included in the company's computation of taxable income is gain from sale of a depreciable asset of $200,000.The income tax basis of the asset was $50,000.The E&P basis of the asset using the alternative depreciation system was $75,000.Compute the company's current E&P for year 1.

Which of the following statements is true?

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:

Jalen transferred his 10 percent interest to Wolverine Company as part of a complete liquidation of the company.In the exchange he received land with a fair market value of $100,000.Jalen's basis in the Wolverine stock was $50,000.The land had a basis to Wolverine Company of $80,000.What amount of gain does Jalen recognize in the exchange and what is his basis in the land he receives?

Otter Corporation reported taxable income of $400,000 from operations for year 1.The company paid federal income taxes of $84,000 on this taxable income.During the year,the company made a distribution of land to its sole shareholder,Emmet Jugg.The land's fair market value was $50,000 and its tax and E&P basis to Otter was $30,000.Emmet assumed a mortgage attached to the land of $10,000.Any gain from the distribution will be taxed at 21%.The company had accumulated E&P of $900,000 at the beginning of the year.Compute Otter's total taxable income and federal income tax paid as a result of the distribution (assume a tax rate of 21%).Using your solution,compute Otter's current E&P for year 1.

Which of the following statements does not describe a tax consequence to shareholders in a complete liquidation?

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

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,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?

Which of the following statements best describes the recognition of loss on property transferred to shareholders in complete liquidation of a corporation?

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:

Which of the following stock distributions would be nontaxable to the shareholder?

Geneva Corporation,a privately held company,has one class of voting common stock,of which 1,000 shares are issued and outstanding.Madison has a 20 percent interest in the partnership.The remaining 80 percent is owned by unrelated individuals.Madison owns 40% of Packer Corporation.The other 60 percent is owned by her father.The shares are owned as follows: $\begin{array}{lccc} \text {Madison Cheeseman}&350\\ \text {Brewer Partnership}&250\\ \text {Brett Cheeseman (Madison's granddaughter)}&100\\ \text {Packer Corporation}&\underline { 300}\\ \text {Total}&\underline { 1000}\\\end{array}$ How many shares of stock is Madison deemed to own under the family attribution rules in a stock redemption?

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.   $\begin{array}{ccc}&\text { Tax Basis}&\text { FMV}&\text { (Appreciation)}\\\text { Cash}&\$ 100,000 & \$ 100,000 & \\\text { Building}&150,000& 200,000 & 50,000 \\\text { Land}&\underline {50,000 }& \underline {120,000}& \underline {70,000} \\\text { Total}&\underline {\$ 300,000}&\underline { \$ 420,000} &\underline {\$ 120,000}\\\end{array}$ 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?