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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 31

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When is a redemption to pay death taxes under § 303 most advantageous?

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The principal advantage of a § 303 redem...

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Question 32

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Briefly describe the rationale for the reduced tax rate on dividends for individual taxpayers.

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The double tax on dividends creates a nu...

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Question 33

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Provide a brief outline on computing current E & P.

A shareholder's basis in property acquired in a stock redemption is the property's fair market value as of the date of redemption.

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?

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 2014. -Meal and entertainment expenses not deducted in 2014 because of the 50% limitation.

How does the payment of a property dividend affect E & P?

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?

In general, if a shareholder's ownership interest is not diminished as a result of a stock redemption, the Code will treat the transaction as a sale or exchange.

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to determine current E & P. -State income tax paid in the current year.

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 2014. -Interest received from municipal bonds in 2014.

Timothy owns 100% of Forsythia Corporation's stock. Corporate employees and annual salaries include Timothy ($300,000); Richard, Timothy's son ($80,000); Rita, Timothy's daughter ($100,000); and Sandy ($120,000). The operation of Forsythia Corporation is shared about equally between Timothy and Sandy (an unrelated party). Richard and Rita are full-time college students at a university about 150 miles away. Forsythia Corporation has substantial E & P but has not distributed a dividend for the past five years. Discuss problems related to the salary arrangement for Forsythia Corporation.

Falcon Corporation ended its first year of operations with taxable income of $250,000. At the time of Falcon's formation, it incurred $50,000 of organizational expenses. In calculating its taxable income for the year, Falcon claimed an $8,000 deduction for the organizational expenses. What is Falcon's current E & P?

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to determine current E & P. -Proceeds of life insurance received upon the death of a key employee (policy had no cash surrender value) .

In determining whether a distribution qualifies as a § 303 redemption to pay death taxes, the stock attribution rules must be applied.

Which of the following is a correct statement regarding a redemption to pay death taxes under § 303?

Do noncorporate and corporate shareholders typically have the same preference for the tax treatment of a stock redemption? Explain.

Coffee Corporation has 2,000 shares of common stock outstanding. John owns 700 of the shares, John's grandfather owns 100 shares, John's father owns 100 shares, John's ex­wife owns 700 shares, and Redbird Partnership owns 400 shares. John is a 50% partner in Redbird Partnership. How many shares is John deemed to own in Coffee Corporation under the § 318 attribution rules?

The adjusted gross estate of Debra, decedent, is $8 million. Debra's estate will incur death taxes and funeral and administration expenses of $1 million. Debra's gross estate includes stock in Silver Corporation that she had purchased twelve years ago for $600,000 (date of death fair market value of $3 million) . At the time of her death, Debra owned 80% of the stock in Silver Corporation. Silver Corporation (E & P of $4 million) redeems all of the estate's stock in the corporation for $3 million. Debra's will names her daughter, Dena, who owns the remaining 20% interest in Silver Corporation, as her sole heir. With respect to this redemption, Debra's estate has the following income:

During the current year, Hawk Corporation sold equipment for $600,000 (adjusted basis of $360,000) . The equipment was purchased a few years ago for $760,000 and $400,000 in MACRS deductions have been claimed. ADS depreciation would have been $300,000. As a result of the sale, the adjustment to taxable income needed to determine current E & P is: