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Exam 13: Corporations: Earnings Profits and Distributions

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Question 1

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Pheasant Corporation,a calendar year taxpayer,has $400,000 of current E & P and a deficit in accumulated E & P of $180,000.If Pheasant pays a $600,000 distribution to its shareholders on July 1,how much dividend income do the shareholders report?

A) $0
B) $20,000
C) $220,000
D) $400,000
E) None of the above

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

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D

Question 2

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The dividends received deduction has no impact on E & P.

A) True
B) False

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Question 3

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Rust Corporation distributes property to its sole shareholder,Andre.The property has a fair market value of $350,000,an adjusted basis of $205,000,and is subject to a liability of $220,000.Current E & P is $500,000.With respect to the distribution,which of the following statements is correct?

Distributions by a corporation to its shareholders are presumed to be a dividend unless the parties can prove otherwise.

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

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?

Stephanie is the sole shareholder and president of Hawk Corporation.She feels that she can justify at least a $220,000 bonus this year because of her performance.However,rather than a bonus in the form of a salary,she plans to have Hawk pay her a $220,000 dividend.Because Stephanie's marginal tax rate is 35%,she prefers to receive a dividend taxed at 15%.Her accountant,however,suggests a $310,000 bonus in lieu of the $220,000 dividend since Hawk Corporation is in the 34% tax bracket.Should Stephanie take the $220,000 dividend or the $310,000 bonus? Support your answer by computing the after-tax cost of the two alternatives to Hawk and to Stephanie.

Scarlet Corporation is an accrual basis,calendar year corporation.Scarlet distributes inventory (basis of $20,000;fair market value of $40,000)to Frank,its shareholder.Assuming that Scarlet has $500,000 of current E & P,what is the impact of the distribution on Scarlet Corporation and on Frank?

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?

Navy Corporation has E & P of $240,000.It distributes land with a fair market value of $70,000 (adjusted basis of $25,000) to its sole shareholder,Troy.The land is subject to a liability of $55,000 that Troy assumes.Troy has:

Christian,the president and sole shareholder of Venture Corporation,is paid an annual salary of $150,000.Christian would like to draw additional funds from the corporation but is concerned that increased salary might cause the IRS to contend his salary is unreasonable.Further,Christian does not want the corporation to pay any dividends.He would like to contribute $40,000 to his alma mater to establish scholarships for needy students.If Christian makes a pledge to the university to provide $40,000 for scholarships,would there be a problem if Venture Corporation paid the pledge on his behalf? Explain.

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?

How does the definition of accumulated E & P differ from the definition of current E & P?

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.

Jen,the sole shareholder of Mahogany Corporation,sold her stock to Jason on July 1 for $90,000.Jen's stock basis at the beginning of the year was $60,000.Mahogany made a $30,000 cash distribution to Jen immediately before the sale,while Jason received a $60,000 cash distribution from Mahogany on November 1.As of the beginning of the current year,Mahogany had $16,000 in accumulated E & P,while current E & P (before distributions)is $30,000.What are the tax consequences of these transactions to Jen and Jason?

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?

The built-in loss limitation in a complete liquidation does not apply to losses attributable to a decline in a property's fair market value after its transfer to the 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?

Purple Corporation has accumulated E & P of $100,000 on January 1,2015.In 2015,Purple has current E & P of $130,000 (before any distribution) .On December 31,2015,the corporation distributes $250,000 to its sole shareholder,Cindy (an individual) .Purple Corporation's E & P as of January 1,2016 is:

Gold Corporation has accumulated E & P of $2 million as of January 1 of the current year.During the year,it expects to have earnings from operations of $1,680,000 and to distribute $900,000 in cash to shareholders.Gold Corporation also expects to sell an asset for a loss of $2 million.Thus,it anticipates incurring a deficit of $320,000 for the year.What can Gold do to minimize the amount of dividend income to its shareholders?