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Exam 7: Corporate Taxation: Nonliquidating Distributions

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Question 1

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General Inertia Corporation made a pro rata distribution of $50,000 to Tiara, Inc. in partial liquidation of the company on December 31, 20X3. Tiara, Inc. owns 500 shares (50%) of General Inertia. The distribution was in exchange for 250 shares of Tiara's stock in the company. After the partial liquidation, Tiara continued to own 50% of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Tiara's income tax basis in the shares was $100 per share. General Inertia had total E&P of $800,000 at the time of the distribution. What amount of dividend or capital gain does Tiara recognize because of the transaction?

A) Tiara does not recognize any dividend income or capital gain.
B) Tiara recognizes capital gain of $50,000.
C) Tiara recognizes dividend income of $50,000.
D) Tiara recognizes capital gain of $25,000.

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

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Question 2

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Elk Company reports negative 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?

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$100,000 dividend income, $75,000 tax-free return of capital, $25,000 capital gain. His tax basis in the Elk stock is $0. Barney reports a dividend of $100,000, the accumulated E&P at December 31, 20X3. The excess $100,000 distribution first reduces his basis in Elk stock, and the excess is treated as capital gain from sale of the stock. His tax basis in Elk stock is $0.

Question 3

Multiple Choice

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

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

Which of the following statements best describes the priority of the tax treatment of a distribution from a corporation to a shareholder?

Terrapin Corporation incurs federal income taxes of $250,000 in 20X3. Terrapin deducts the federal income taxes in computing its current earnings and profits for 20X3.

Which of the following forms of earnings distributions would not be subject to double taxation at the corporate and shareholder level?

Only taxable income and deductible expenses are included in the computation of current earnings and profits.

Lansing Company is owned equally by Jennifer, her husband Dan, and DeWitt Corporation, which is owned 50 percent by Jennifer and her sister Jane. Each of the three shareholders holds 100 shares in the company. Under the §318 stock attribution rules, how many shares of Lansing stock is Jennifer deemed to own?

Comet Company is owned equally by Pat and his sister Pam, each of whom hold 100 shares in the company. Comet redeems 50 of Pam's shares on December 31, 20X3, for $1,000 per share in a transaction that Pam treats as an exchange for tax purposes. Comet has total E&P of $250,000 on December 31, 20X3. What are the tax consequences to Comet because of the stock redemption?

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

A corporation's "earnings and profits" account is equal to the company's "retained earnings" account on its balance sheet.

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?

Viking Corporation is owned equally by Sven and his wife Olga, each of whom hold 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?

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

Crescent Corporation is owned equally by George and his daughter Olympia, each of whom own 100 shares in the company. George wants to retire from the company, and it was decided that the company will redeem all 100 of his shares for $10,000 per share on December 31, 20X3. George's income tax basis in each share is $2,000. Crescent has current E&P of $1,000,000 and accumulated E&P of $5,000,000. What must George do to ensure that the redemption will be treated as an exchange?

Au Sable Corporation reported taxable income of $800,000 in 20X3 and paid federal income taxes of $272,000. Not included in the computation was a disallowed penalty of $25,000, life insurance proceeds of $100,000, and a Federal income tax refund from 20X2 of $50,000. Au Sable is an accrual basis taxpayer. The corporation's current earnings and profits for 20X3 would be:

The "family attribution" rules are automatically waived in a complete redemption of a shareholder's stock.

Green Corporation has negative current earnings and profits of ($100,000) and positive accumulated earnings and profits of $250,000. A $50,000 distribution from Green to its sole shareholder will be treated as a dividend because total earnings and profits is a positive $150,000.

Longhorn Company reports current E&P of $100,000 in 20X3 and accumulated E&P at the beginning of the year of negative $200,000. Longhorn distributed $300,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in his stock in Longhorn is $100,000. How is the distribution treated by the shareholder in 20X3?