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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 81

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Keshia owns 200 shares in Parakeet Corporation.Keshia has a 30% beneficiary interest in her deceased grandmother's estate.The estate owns 400 shares in Parakeet Corporation.None of the other beneficiaries of the estate own stock in Parakeet.In applying the § 318 attribution rules:

A) The estate owns 400 shares.
B) Keshia owns 320 shares.
C) Keshia owns 600 shares.
D) The estate owns 460 shares.
E) None of the above.

F) A) and B)
G) A) and E)

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Question 82

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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:

A) No adjustment is required.
B) Subtract $100,000.
C) Add $100,000.
D) Add $80,000.
E) None of the above.

F) A) and E)
G) A) and B)

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Question 83

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Hannah,Greta,and Winston own the stock in Redpoll Corporation (E & P of $900,000) as follows: Hannah,600 shares;Greta,400 shares;and Winston,1,000 shares.Greta is Hannah's daughter,and Winston is Hannah's brother.Redpoll Corporation redeems 400 of Hannah's shares (basis of $55,000) for $240,000.Hannah purchased the stock three years ago as an investment.With respect to the stock redemption,Hannah has:

Bristlebird Corporation (E & P of $700,000) has 3,000 shares of common stock outstanding.Juan owns 1,500 shares and his wife,Roberta,owns 1,500 shares.Juan and Roberta each have a basis of $90,000 in their Bristlebird stock.In the current year,Bristlebird Corporation redeems 1,000 shares from Juan for $250,000.With respect to the distribution in redemption of the Bristlebird stock:

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.

Lena is the sole shareholder and president of Gold Corporation.She feels that she can justify at least a $50,000 bonus this year because of her performance for the company.However,rather than a bonus in the form of a salary,she considers having Gold pay her a $50,000 dividend.She believes this would be preferable because it will be taxed at only 15% instead of her marginal rate of 35%.Her CPA has advised her to pay a $75,000 bonus in lieu of the $50,000 dividend.Assuming that Gold Corporation is in a 34% tax bracket,should Lena take the $50,000 dividend or the $75,000 bonus? Support your answer by computing the after-tax cost of the two alternatives to Gold and to Lena.

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.

A corporation that distributes a property dividend must reduce its E & P by the adjusted basis of the property less any liability on the property.

adjusted to arrive at current E & P for 2015. a.Increase b.Decrease c.No effect -Excess capital loss in year incurred.

Which of the following statements regarding constructive dividends is not correct?

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?

No E & P adjustment is required for regular tax gains under the installment method.

Tracy and Lance,equal shareholders in Macaw Corporation,receive $600,000 each in distributions on December 31 of the current year.Macaw's current year taxable income is $1 million and it has no accumulated E & P.Last year,Macaw sold an appreciated asset for $1,200,000 (basis of $400,000) .Payment for one-half of the sale of the asset was made this year.How much of Tracy's distribution will be taxed as a dividend?

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:

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

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.

Puffin Corporation's 2,000 shares outstanding are owned as follows: Paul,800 shares;Sandra (Paul's sister),800 shares;and Greta (Paul's granddaughter),400 shares.During the current year,Puffin (E & P of $1 million) redeemed 600 shares of Paul's stock for $100,000.If Paul had acquired the 600 shares five years ago for $30,000,he will have a long-term capital gain of $70,000 from the redemption.

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

On January 30,Juan receives a nontaxable distribution of stock rights from Platinum Corporation.Each right entitles the holder to purchase one share of stock for $40.One right is issued for every share of stock owned.Juan owns 100 shares of stock purchased two years ago for $4,000.At the date of distribution,the rights are worth $1,000 (100 rights at $10 per right) and Juan's stock in Platinum is worth $5,000 (or $50 per share) .On December 1,Juan sells all 100 stock rights for $12 per right.How much gain does Juan recognize on the sale?

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