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Exam 5: Corporations Earnings Profits and Dividend Distributions

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Question 21

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Maria and Christopher each own 50% of Cockatoo Corporation, a calendar year taxpayer. Distributions from Cockatoo are: $750,000 to Maria on April 1 and $250,000 to Christopher on May 1. Cockatoo's current E & P is $300,000 and its accumulated E & P is $600,000. How much of the accumulated E & P is allocated to Christopher's distribution?

A) $0
B) $75,000
C) $150,000
D) $300,000
E) None of the above

F) C) and D)
G) B) and E)

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Question 22

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Starling Corporation has accumulated E & P of $60,000 on January 1, 2016. In 2016, Starling Corporation had an operating loss of $80,000. It distributed cash of $40,000 to Zoe, its sole shareholder, on December 31, 2016. Starling Corporation's balance in its E & P account as of January 1, 2017, is:

A) $60,000 deficit.
B) $20,000 deficit.
C) $0.
D) $60,000.
E) None of the above.

F) A) and B)
G) B) and D)

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Question 23

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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?

Briefly define the term "earnings and profits."

At the beginning of the current year, Doug and Alfred each own 50% of Amaryllis Corporation (a calendar year taxpayer) . In July, Doug sold his stock to Kevin for $140,000. At the beginning of the year, Amaryllis Corporation had accumulated E & P of $240,000 and its current E & P is $280,000 (prior to any distributions) . Amaryllis distributed $300,000 on February 15 ($150,000 to Doug and $150,000 to Alfred) and distributed another $300,000 on November 1 ($150,000 to Kevin and $150,000 to Alfred) . Kevin has dividend income of:

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?

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 2016. -Gain on installment sale in 2016 deferred until 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?

Kite Corporation, a calendar year taxpayer, has taxable income of $360,000 for 2017. Among its transactions for the year are the following: $\begin{array}{l}\text { Collection of proceeds from insurance policy on life of corporate }\\\begin{array} { l r } \text { officer (in excess of cash surrender value) } & \$ 9,000 \\\text { Realized gain (not recognized) on an involuntary conversion } & 10,000 \\\text { Nondeductible fines and penalties } & 21,000\end{array}\end{array}$ Disregarding any provision for Federal income taxes, determine Kite Corporation's current E & P for 2017.

Constructive dividends do not need to satisfy the legal requirements for a dividend as set forth by applicable state law.

Ashley, the sole shareholder of Hawk Corporation, has a stock basis of $200,000 at the beginning of the year. On July 1, she sells all of her stock to Matt for $1 million. On January 1, Hawk has accumulated E & P of $90,000 and during the year, current E & P of $160,000. Hawk makes the following cash distributions: $270,000 to Ashley on March 31 and $90,000 to Matt on December 1. How are the distributions taxed to Ashley and Matt? What is Ashley's recognized gain on the sale to Matt?

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

Tangelo Corporation has an August 31 year-end. Tangelo had $50,000 in accumulated E & P at the beginning of its 2017 fiscal year (September 1, 2016) and during the year, it incurred a $75,000 operating loss. It also distributed $65,000 to its sole shareholder, Cass, on November 30, 2016. If Cass is a calendar year taxpayer, how should she treat the distribution when she files her 2016 income tax return (assuming the return is filed by April 15, 2017) ?

All cash distributions received from a corporation with a positive balance in accumulated E & P at the beginning of the year will be taxed as dividend income.

Renee, the sole shareholder of Indigo Corporation, sold her stock to Chad on July 1 for $180,000. Renee's stock basis at the beginning of the year was $120,000. Indigo made a $60,000 cash distribution to Renee immediately before the sale, while Chad received a $120,000 cash distribution from Indigo on November 1. As of the beginning of the current year, Indigo had $26,000 in accumulated E & P, while current E & P (before distributions) was $90,000. Which of the following statements is correct?

Stacey and Andrew each own one-half of the stock in Parakeet Corporation, a calendar year taxpayer. Cash distributions from Parakeet are: $350,000 to Stacey on April 1 and $150,000 to Andrew on May 1. If Parakeet's current E & P is $60,000, how much is allocated to Andrew's distribution?

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?

Dividends paid to shareholders who hold both long and short positions do not qualify for the reduced tax rate available to individuals in certain years.

Puffin Corporation makes a property distribution to its sole shareholder, Bonnie. The property distributed is a car (basis of $30,000; fair market value of $20,000) that is subject to a $6,000 liability which Bonnie assumes. Puffin has no accumulated E & P and $30,000 of current E & P from other sources during the year. What is Puffin's E & P after taking into account the distribution of the car?

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: