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Exam 7: Corporate Taxation: Non-Liquidating Distributions

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Question 41

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Loon, Incorporated reported taxable income of $600,000 in 20X3 and paid federal income taxes of $202,000. Not included in the company's computation of taxable income is tax-exempt interest of $30,000, disallowed meals and entertainment expenses of $15,000, and disallowed expenses related to the tax-exempt income of $4,000. Loon deducted depreciation of $200,000 on its tax return. Under the alternative (E&P) depreciation method, the deduction would have been $80,000. Compute the company's current E&P for 20X3.

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$529,000
$600,000 + $30,000 ta...

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Question 42

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Otter Corporation reported taxable income of $400,000 from operations for 20X3. The company paid federal income taxes of $136,000 on this taxable income. During the year, the company made a distribution of land to its sole shareholder, Emmet Jugg. The land's fair market value was $50,000 and its tax and E&P basis to Otter was $30,000. Emmet assumed a mortgage attached to the land of $10,000. The company had accumulated E&P of $900,000 at the beginning of the year. Compute Otter's total taxable income and federal income tax paid because of the distribution (assume a tax rate of 21 percent). Using your solution, compute Otter's current E&P for 20X3.

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Taxable income of $4...

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Question 43

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Terrapin Corporation incurs federal income taxes of $250,000 in 20X3. Terrapin deducts the federal income taxes in computing its current E&P for 20X3.

Green Corporation has current E&P of $100,000 and a deficit in accumulated E&P of ($200,000). A $50,000 distribution from Green to its sole shareholderat year-end will not be treated as a dividend because total E&P is a deficit ($100,000).

Sherburne Corporation reported current E&P for 20X3 of $500,000. During the year, the company made a distribution of land to its sole shareholder, Ted Bozeman. The land's fair market value was $150,000 and its tax and E&P basis to Sherburne was $100,000. Ted assumed a mortgage attached to the land of $25,000. What amount of dividend income does Ted report because of the distribution, and what is Ted's income tax basis in the land received from Sherburne?

Aztec Company reports current E&P of $200,000 in 20X3 anda deficit of ($100,000) in accumulated E&P at the beginning of the year. Aztec distributed $300,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?

Comet Company is owned equally by Pat and his sister Pam, each of whom holds 105 shares in the company. Pam wants to reduce her ownership in the company, and it was decided that the company will redeem 54 of her shares for $1,080 per share on December 31, 20X3. Pam's income tax basis in each share is $400. Comet has total E&P of $300,000. What are the tax consequences to Pam because of the stock redemption?

Tammy owns 60 percent of the stock of Huron Corporation. Unrelated individuals own the remaining 40 percent. For a stock redemption of a portion of Tammy's shares 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.

Viking Corporation is owned equally by Sven and his wife, Olga, each of whom holds 100 shares in the company. Viking redeemed 75 shares of Sven's stock for $2,000 per share on December 31, 20X3. Viking has total E&P of $500,000. What are the tax consequences to Viking because of the stock redemption?

Bruin Company reports current E&P of $200,000 in 20X3 and accumulated E&P at the beginning of the year of $100,000. Bruin distributed $400,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?

The recipient of a taxable stock distribution will have a tax basis in the stock equal to the fair market value of the stock received.

Stock distributions are always tax-free to the recipient shareholder.

A stock redemption is always treated as a sale or exchange for tax purposes.

Which of the following statements is true?

Elk Company reports a deficit in current E&P of ($200,000) and positive accumulated E&P of $300,000. Elk distributed $200,000 to its sole shareholder, Barney Rubble, on December 31, 20X3. Barney's tax basis in his Elk stock is $75,000. What is the tax treatment of the distribution to Barney, and what is his tax basis in Elk stock after the distribution?

A distributionof cash from a corporation to a shareholder will always result in a dividend for tax purposes.

Viking Corporation is owned equally by Sven and his wife, Olga, each of whom holds 100 shares in the company. Viking redeemed 75 shares of Sven's stock in the company on December 31, 20X3. Viking paid Sven $2,000 per share. His income tax basis in each share is $1,000. Viking has total E&P of $500,000. What are the tax consequences to Sven because of the stock redemption?

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

Oakland Corporation reported a net operating loss of $500,000 in 20X3 and elected to carry the loss forward to 20X4. Not included in the computation was a disallowed meals and entertainment expense of $20,000, tax-exempt income of $10,000, and deferred gain on a current-year transaction treated as an installment sale of $250,000. The corporation's current E&P for 20X3 would be:

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?