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Exam 7: Corporate Taxation: Nonliquidating Distributions

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Question 31

True/False

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Compensation paid to a shareholder and subsequently recharacterized by the IRS as a dividend because it was considered "unreasonable" will affect only the income tax liability of the corporation paying the compensation and the receiving shareholder.

A) True
B) False

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Question 32

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Which of the following stock dividends would be tax-free to the shareholder?

A) A 2-for-1 stock split to all holders of common stock.
B) A stock dividend where the shareholder could choose between cash and stock.
C) A stock dividend to all holders of preferred stock.
D) A 2-for-1 stock split to all holders of common stock and a stock dividend to all holders of preferred stock are tax-free to the shareholder.

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

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Question 33

True/False

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Siblings are considered "family" under the stock attribution rules that apply to stock redemptions.

Crystal,Inc.is owned equally by John and his wife Arlene,each of whom own 500 shares in the company.Arlene wants to reduce her ownership in the company,and it was decided that the company will redeem 200 of her shares for $5,000 per share on December 31,20X3.Arlene's income tax basis in each share is $1,000.Crystal has current E&P of $1,000,000 and accumulated E&P of $3,000,000.What is the amount and character (capital gain or dividend)recognized by Arlene as a result of the stock redemption,assuming only the "substantially disproportionate with respect to the shareholder" test is applied?

Geneva Corporation,a privately-held company,has one class of voting common stock,of which 1,000 shares are issued and outstanding.The shares are owned as follows: 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. How many shares of stock is Madison deemed to own under the family attribution rules in a stock redemption?

Townsend Corporation declared a 1-for-1 stock split to all common stock shareholders of record on December 31,20X3.Townsend reported current E&P of $400,000 and accumulated E&P of $1,000,000.The total fair market value of the stock distributed was $500,000.Regina Williams owned 1,000 shares of Townsend common stock with a tax basis of $200 per share ($2,000,000 total).The fair market value of the common stock was $300 per share on December 31,20X3.What is Regina's income tax basis per share in the new and existing common stock she owns in Townsend,assuming the distribution is tax-free?

Tammy owns 60 percent of the stock of Huron Corporation.Unrelated individuals own the remaining 40 percent.For a stock redemption to be treated as an exchange under the "substantially disproportionate" rule,the redemption must reduce Tammy's stock ownership in Huron Corporation below 48 percent.

St.Clair Company reports positive current E&P of $500,000 in 20X3 and positive accumulated E&P at the beginning of the year of $400,000.St.Clair Company distributed $600,000 to its sole shareholder,Danielle Brush on December 31,20X3.Danielle's tax basis in her St.Clair stock is $120,000.How much of the $600,000 distribution is treated as a dividend to Danielle and what is her basis in St.Clair stock after the distribution?

Green Corporation has current earnings and profits of $100,000 and negative accumulated earnings and profits of ($200,000).A $50,000 distribution from Green to its sole shareholder will not be treated as a dividend because total earnings and profits is a negative $100,000.

Which of the following individuals is not considered "family" for purposes of applying the stock attribution rules to a stock 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?

A distribution in partial liquidation of a corporation is always treated as a sale or exchange by an individual shareholder.

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 must reduce its earnings and profits by $100,000 because of the redemption.

Evergreen Corporation distributes land with a fair market value of $200,000 to its sole shareholder.Evergreen's tax basis in the land is $50,000.Assuming sufficient earnings and profits,the amount of dividend reported by the shareholder is $200,000.

Sam owns 70 percent of the stock of Club Corporation.Unrelated individuals own the remaining 30 percent.For a stock redemption of Sam's stock to be treated as an exchange under the "substantially disproportionate" test,what percentage of Club stock must Sam own after the redemption?

Which of the following payments could be treated as a constructive dividend by the IRS?

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

Which statement best describes the concept of the "double taxation" of corporation income?

Sara owns 60 percent of the stock of Lea Corporation.Unrelated individuals own the remaining 40 percent.For a stock redemption of Sara's stock to be treated as an exchange under the "substantially disproportionate" test,what percentage of Lea stock must Sara own after the redemption?

Montclair Corporation had current and accumulated E&P of $500,000 at December 31,20X3.On December 31,the company made a distribution of land to its sole shareholder,Molly Pitcher.The land's fair market value was $200,000 and its tax and E&P basis to Montclair was $50,000.Molly assumed a liability of $25,000 attached to the land.The tax consequences of the distribution to Montclair in 20X3 would be: