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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 61

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On January 1,Tulip Corporation (a calendar year taxpayer) has accumulated E & P of $300,000.Its current E & P for the year is $90,000 (before considering dividend distributions).During the year,Tulip distributes $600,000 ($300,000 each) to its equal shareholders,Anne and Tom.Anne has a basis in her stock of $65,000,while Tom's basis is $120,000.What is the effect of the distribution by Tulip Corporation on Anne and Tom?

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Anne and Tom each have dividend income o...

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Question 62

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If a distribution of stock rights is taxable and their fair market value is less than 15 percent of the value of the old stock,then either a zero basis or a portion of the old stock basis may be assigned to the rights,at the shareholder's option.

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Question 63

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The stock in Crimson Corporation is owned by Angel and Melawi,who are unrelated.Angel owns 60% and Melawi owns 40% of the stock.All of Crimson Corporation's assets were acquired by purchase.The following assets are to be distributed in complete liquidation of Crimson Corporation: ​ a.What gain or loss, if any, would Crimson Corporation recognize if it distributes the cash, inventory, and equipment to Angel and the land to Melawi? b.What gain or loss, if any, would Crimson Corporation recognize if it distributes the equipment and land to Angel and the cash and inventory to Melawi?

For purposes of the waiver of the family attribution rules in a complete termination redemption,the former shareholder must notify the IRS within 30 days of acquiring a prohibited interest in the corporation during the 10-year period following the redemption.

Tungsten Corporation,a calendar year cash basis taxpayer,made estimated tax payments of $800 each quarter in 2017,for a total of $3,200.Tungsten filed its 2017 tax return in 2018 and the return showed a tax liability $4,200.At the time of filing,March 15,2018,Tungsten paid an additional $1,000 in Federal income taxes.How does the additional payment of $1,000 impact Tungsten's E & P?

In the current year,Quail Corporation distributed installment notes payable in redemption of some of its shares.Quail incurred the following expenditures in connection with the redemption: accounting fees of $7,000 and legal fees of $8,000.In addition,Quail paid $10,000 of interest expense on the installment notes payable.The distribution was a qualifying stock redemption.How much of the $25,000 is deductible in the current year?

Blue Corporation has a deficit in accumulated E & P of $300,000 and has current E & P of $225,000.On July 1,Blue distributes $250,000 to its sole shareholder,Sam,who has a basis in his stock of $52,500.As a result of the distribution,Sam has:

Matching Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. a.Increase b.Decrease c.No effect -Domestic production activities deduction claimed in 2017.

At the beginning of the current year,Paul and John each own 50% of Apple Corporation.In July,Paul sold his stock to Sarah for $110,000.At the beginning of the year,Apple Corporation had accumulated E & P of $200,000 and its current E & P is $250,000 (prior to any distributions).Apple distributed $260,000 on March 1 ($130,000 to Paul and $130,000 to John) and distributed another $260,000 on October 1 ($130,000 to Sarah and $130,000 to John).What are the tax implications of the $130,000 distribution to Sarah?

Corporate distributions are presumed to be paid out of E & P and are treated as dividends unless the parties to the transaction can show otherwise.

​ Using the legend provided, classify each statement accordingly. In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.​ a.Increase b.Decrease c.No effect -State income tax paid in the current year.

Brown Corporation,an accrual basis corporation,has taxable income of $150,000 in the current year.Included in its determination of taxable income are the following transactions. ​ What is Brown's current E & P for the year?

How does the definition of accumulated E & P differ from the definition of current E & P?

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.

Hawk Corporation has 2,000 shares of stock outstanding: Marina owns 800 shares,Russell owns 500 shares,Velvet Partnership owns 400 shares,and Yellow Corporation owns 300 shares.Marina and Russell,unrelated individuals,are equal partners of Velvet Partnership.Marina owns 35% of the stock in Yellow Corporation. a.Applying the § 318 stock attribution rules, determine how many shares in Hawk Corporation each shareholder owns, directly and indirectly:Marina:Russell:Velvet Partnership:Yellow Corporation: b.Assume, instead, that Marina owns 60% of Yellow Corporation. How many shares does Marina own, directly and indirectly, in Hawk Corporation?

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?

Maria owns 75% and Christopher owns 25% of Cockatoo Corporation,a calendar year taxpayer.Cockatoo makes a $600,000 distribution to Maria on April 1 and a $200,000 distribution to Christopher on May 1.Cockatoo's current E & P is $120,000 and its accumulated E & P is $500,000.What are the tax implications of the distributions to Maria and Christopher?

When current E & P is positive and accumulated E & P has a deficit balance,the two accounts are netted for dividend determination purposes.

Hazel,Emily,and Frank,unrelated individuals,own all of the stock in Wren Corporation (E & P of $1.2 million) as follows: Hazel,1,500 shares; Emily,300 shares; and Frank,200 shares.Wren redeems 900 of Hazel's shares (basis of $210,000) for $625,000.With respect to the distribution in redemption of the stock:

When current E & P has a deficit and accumulated E & P is positive,the two accounts are netted at the date of the distribution.If a positive balance results,the distribution is a dividend to the extent of the balance.