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Exam 10: Corporations: Earnings Profits and Distributions

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Question 31

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Nondeductible meal and entertainment expenses must be subtracted from taxable income to determine current E & P.

A) True
B) False

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Question 32

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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?

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As a result of the distribution,Kathleen...

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Question 33

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In a property distribution,the amount of dividend income recognized by a shareholder is always reduced by the amount of liability assumed by a shareholder.

As of January 1,Cassowary Corporation has a deficit in accumulated E & P of $100,000.For the tax year,current E & P (accrued ratably) is $240,000 (prior to any distributions) .On July 1,Cassowary Corporation distributes $275,000 to its sole shareholder.The amount of the distribution that is a dividend is:

Which one of the following statements about property distributions is false?

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

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

A corporate shareholder that receives a constructive dividend cannot apply a dividends received deduction to the distribution.

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.

Pursuant to a complete liquidation,Lilac Corporation distributes the following assets to its unrelated shareholders: land held for three years as an investment (basis of $300,000,fair market value of $600,000) ,inventory (basis of $100,000,fair market value of $80,000) ,and marketable securities held for four years as an investment (basis of $200,000,fair market value of $240,000) .What are the tax consequences to Lilac Corporation as a result of the liquidation?

Starling Corporation has accumulated E & P of $60,000 on January 1,2013.In 2013,Starling Corporation had an operating loss of $80,000.It distributed cash of $40,000 to Zoe,its sole shareholder,on December 31,2013.Starling Corporation's balance in its E & P account as of January 1,2014,is:

Glenda is the sole shareholder of Condor Corporation.She sold her stock to Melissa on October 31 for $150,000.Glenda's basis in Condor stock was $50,000 at the start of the year.Condor distributed land to Glenda immediately before the sale.Condor's basis in the land was $20,000 (fair market value of $25,000) .On December 31,Melissa received a $75,000 cash distribution from Condor.During the year,Condor has $20,000 of current E & P and its accumulated E & P balance on January 1 is $10,000.Which of the following statements is true?

Briefly define the term "earnings and profits."

In the current year,Carnation Corporation has a § 179 expense of $60,000.As a result,in the current year,taxable income must be increased by $48,000 to determine current E & P.

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.

Under certain circumstances,a distribution can generate (or add to)a deficit in E & P.

A distribution in excess of E & P is treated as capital gain by shareholders.

Albatross Corporation acquired land for investment purposes in 1999 at a cost of $100,000.Albatross sold the land to Monty on December 30,2013,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 2014 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 2013 and 2014.

A realized gain from an involuntary conversion under § 1033 that is not recognized for income tax purposes has no effect on E & P.

Robin Corporation,a calendar year taxpayer,has a deficit in current E & P of $200,000 and a $580,000 positive balance in accumulated E & P.If Robin determines that a $700,000 distribution to its shareholders is appropriate at some point during the year,what is the maximum amount of the distribution that could potentially be treated as a dividend?